Shares of Doximity (DOCS -1.42%) skyrocketed in the first few months after the company's initial public offering in June 2021. That sizzling momentum didn't last long, though. By mid-September, Doximity stock began to fall. And fall. And fall even more. The online networking platform for medical professionals went on to lose roughly two-thirds of its market cap.
After this steep decline, it's inevitable that some investors might wonder whether or not the stock is due for a major rebound. There are different views on how to answer that question. Here are the bull and bear arguments for Doximity stock.
Bull case: Tremendous growth ahead
Probably the best reason to buy Doximity stock now is that the company has a tremendous growth opportunity ahead. Management estimates that its total addressable market in the U.S. stands at $18.5 billion right now. Roughly $7.3 billion of that potential market is tied to Doximity's current primary revenue source -- drugmakers marketing to healthcare professionals. Another $6.9 billion is in healthcare systems marketing to and recruiting healthcare professionals. Doximity thinks there's an additional $4.3 billion opportunity in telehealth.
The company doesn't have to capture all of that addressable market to be a massive winner. Assuming a price-to-sales multiple of 4, Doximity would only need to gain a market share of 18% for its market cap to more than double.
Doximity already has the most important ingredient necessary for it to achieve success: millions of healthcare professionals. Four out of five physicians in the U.S. use its online platform. It also has relationships with major biopharmaceutical companies and hospitals and health systems. Doximity's client base includes all of the top 20 organizations in those arenas.
There are plenty of problems for Doximity to solve for medical professionals as well. CEO Jeff Tangney stated in the latest quarterly update that the company plans to be a leader in using artificial intelligence to streamline physicians' workflows. Doximity is already making progress toward that goal with its integration with OpenAI's ChatGPT.
Arguably, the main thing Doximity needs to once again generate enthusiasm among investors is a new bull market. And sooner or later, we'll get one.
Bear case: Valuation matters
Bears would probably respond to that bull case with the phrase: Show me the money. In its fiscal 2023, which ends March 31, Doximity expects revenue of between $417.7 million and $418.7 million. It projects fiscal 2024 revenue of more than $500 million.
Even if we assume that Doximity is able to grow its revenue to $600 million by the end of its next fiscal year, the stock would still trade at more than 10.7 times sales based on its current market cap. Valuation matters, regardless of what a company's growth prospects might be.
Doximity's revenue increased by 18% year over year in its latest quarter. That's not bad. However, there's a good case to be made that it's not enough to justify the stock's current valuation. The company's earnings decline in its fiscal 2023 third quarter makes this argument even more compelling.
Also, those total addressable market numbers that Doximity talks about include all pharmaceutical marketing to U.S. doctors. It will be a major challenge for the company's digital platform to significantly impact drugmakers' spending on other physician marketing efforts, such as face-to-face visits by pharmaceutical sales representatives. A bear could argue that Doximity's realistic total addressable market could be much smaller than the $18.5 billion figure the company uses.
A bull in waiting
The primary bull case for Doximity has merit. It does have tremendous growth prospects. It's also likely that a new bull market would cause the shares to rise. However, the bears are correct that valuation matters. And Doximity's true total addressable market probably is well below $18.5 billion.
My view is that Doximity could be a great healthcare stock for long-term investors, but it needs to do more to prove it. I'd like to see stronger revenue and earnings growth. It would also help if Doximity can demonstrate that it can convince drugmakers, hospitals, and health systems to move a significant portion of their marketing spending that now goes elsewhere to its platform. I lean toward the bear case for now with Doximity, but I could become a bull if it makes progress on these fronts.
