Healthcare stocks often get attention during periods of market uncertainty or economic pain. Rain or shine, healthcare is a necessity, so revenue and profitability from these businesses tend to be highly stable.
That helps explain why this sector of the stock market fared quite well during the bear market of 2022. Healthcare stocks, as measured by the Vanguard Healthcare ETF, only fell 7% last year compared to a 20% drop for the S&P 500.
Data by YCharts.
However, as the stock market heats up again, many of these same stocks are lagging behind in favor of higher-growth companies -- but not all of them. Strong long-term expansion can be found even within healthcare. Two such stocks poised to do well are Intuitive Surgical (ISRG 0.59%) and Doximity (DOCS 0.97%). Here's why.
Intuitive Surgical: The robotic surgery pioneer makes a comeback
Shares of robotic-assisted surgery leader Intuitive Surgical have notched an impressive rally, jumping nearly 70% since the autumn of 2022. Investors are feeling cheery about the company's continual growth despite ongoing COVID disruptions, a sluggish economic rebound in China, and supply chain issues causing hiccups in the manufacture of its da Vinci surgical robots.
First-quarter revenue was up 14% year over year to $1.7 billion, driven by a 26% rise in the number of procedures performed with an Intuitive system, and an increase in the installed base of its robots to 7,779 at the end of March 2023 versus 6,920 a year before.
However, as has been the issue for over a year now, Intuitive's higher sales have not translated into higher profitability. Over the last few years, earnings per share (EPS) and free cash flow have been checked by rising component and manufacturing costs, supply chain issues, and the company's own increased spending on development of new devices.
The newest system, Ion, is still in the very early stages of distribution. As more Ion machines are sold, and regulatory clearance is given in key markets like Europe, this should also help profit margins make a comeback.
Data by YCharts. TTM = trailing 12 months.
In the interim, Intuitive carries a very high premium, in part due to these slightly depressed profit margins. The stock trades for 85 times trailing-12-month earnings right now.
Nevertheless, Intuitive will remain a leader in robotic surgery for many years to come, and management is confident it has a plan in place to rekindle profit growth. For investors looking for a long-term story, this robotic care provider is a top-notch choice. Consider using a dollar-cost averaging plan to build a position over time.
Doximity: A software provider ready to pop higher?
Doximity has made its name as a type of social network for physicians. It says more than 80% of U.S. physicians and more than half of nurse practitioners and physician assistants are on the Doximity app.
From that base, the company monetizes its service via advertising, providing a base for big pharma and medical device manufacturers as well as healthcare-network headhunting and the like.
This was a hypergrowth stock when it made its public debut in the summer of 2021. Revenue slowed to a much more modest 22% in its 2023 fiscal year (ended in March). That is likely to continue in the next year as many healthcare ad partners pare back spending. Doximity is anticipating 20% revenue growth to about $503 million in fiscal 2024.
Meanwhile, the company is trying to tap a second revenue stream with a growing number of workflow management tools within its app. These include appointment management, physician-to-patient and peer-to-peer video calls, and digital faxing and e-signatures.
Management thinks these new offerings can help it average 20% annual revenue growth through the next five years to fiscal 2028, at which point it believes it will reach $1 billion in sales.
Best of all, though, this has been a highly profitable business from the start, and that remains Doximity's focus. Its profit margin under adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was 43.9% last year, and Doximity expects to boost that to 45% in the coming years.
That should generate a high rate of free cash flow (which was at a 41% profit margin last year), fueling the company's cash return to shareholders via stock buybacks. A new repurchase authorization worth $200 million was recently announced.
Data by YCharts.
Given this long-term outlook, Doximity's valuation at 61 times trailing-12-month earnings per share, or 39 times free cash flow, is a premium. But if you believe the company can continue growing its profitability per share in excess of its 20% forecast annually in the next five years, it isn't an unreasonable price tag.
Doximity could have lots of potential as it helps make healthcare more efficient, and it's done a great job as a shareholder-friendly business so far in its short story as a publicly traded company. This is another stock to dollar-cost average into if you believe the long-term story will play out favorably.
