After doubling on its first day of trading and nearly doubling again in the next few months, shares of Doximity (DOCS -1.47%) have been on a steady march downward -- losing over 70% of its value from its all-time highs.
Doximity's stock was caught in the all-too-common trap of initial public offering (IPO) hype, followed by a year or more of turbulence as the business settled into being a public company. As gut-wrenching as this has been for early investors, the actual business behind the stock continues to look quite impressive.
This divergence between share price and operational performance leaves us wondering: Is now the time to buy Doximity at roughly 35% above its all-time lows? Let's explore.
Bloomberg for physicians
Doximity is often called the "LinkedIn for doctors" due to 80% of U.S. physicians and 90% of medical graduates using its platform. Its network, newsfeed, and hiring solutions do have some similarities to the career-focused social media company.
However, CEO and co-founder Jeffrey Tangney somewhat disagreed with this notion, explaining: "By connecting doctors in their daily work, from finding which cardiologist is on call, to viewing their profile, to calling or messaging them, we believe we become the physician cloud, a workflow and communications hub whose usage is more analogous to a Bloomberg than a LinkedIn."
Of course, Doximity's app can also be used as a career advancement tool, like LinkedIn. But its true power lies in its ability to increase productivity for its physicians and providers -- much like Bloomberg's terminals do for finance. With 80% of U.S. healthcare documents still being sent via mail and fax, it is no surprise that 78% of physicians report burnout, with information technology (such as fax machines) being a key contributor to the problem.
Doximity has a suite of productivity-boosting telehealth offerings, such as:
- Dialer: Private video (or voice) calling or texting between physicians and patients
- Amion: For physician scheduling
- E-signatures
- Fax on-the-go
- Personalized newsfeed of articles to earn continuing medical education credits
The company maintains high user engagement among physicians through these tools, creating a valuable marketing opportunity for pharmaceutical companies and hospital systems. Knowing that most U.S. physicians use Doximity and control around 73% of the U.S.'s $4 trillion healthcare spending, these pharmaceutical companies and hospitals are desperate to place ads on the platform and show their offerings to doctors.
And the proof of this? All of the top 20 pharmaceutical manufacturers and hospital systems are currently Doximity's customers.
Better yet -- these massive customers reported a promising dollar-based net retention (DBNR) rate of 124% in the fourth quarter of 2023. DBNR measures the amount an existing group of customers spends from one year to the next. This means that the company's biggest clients spent 24% more than last year -- an encouraging sign in a weak advertising market.
While Doximity's sales growth may have slowed to 18% in Q4, it still has less than a 5% market share of advertising spend from the 415 biggest U.S. prescription labels, leaving a massive growth runway ahead.
Robust cash generation supports a premium valuation
Best yet for investors? Doximity boasts a free cash flow (FCF) margin of 30% -- even after accounting for stock-based compensation. With $111 million in sales during its most recent quarter, Doximity generated a staggering $46 million in FCF -- or $33 million without stock-based compensation.
DOCS Free Cash Flow (Quarterly) data by YCharts
These steadily improving figures are remarkable for a company as new to the public markets as Doximity and have caused its price-to-FCF (P/FCF) ratio to drop to near all-time lows.
DOCS Price to Free Cash Flow data by YCharts
While it's still a premium to the broader market, the company's early FCF generation at such a young age is relatively rare among its tech-facing peers. This robust FCF creation, paired with the company's massive growth runway remaining in the $14 billion pharmaceutical and healthcare advertising market, makes the company look like a no-brainer.
With Doximity growing rapidly alongside its massive customers -- and with this $14 billion in ad spend expected to hit $20 billion by 2024 -- the company's price tag, or market capitalization, of $6 billion could prove to be far too low with time.
