There's a big difference between being in the right place at the right time and executing well on a business opportunity. After a few years of stellar growth during the pandemic, it suddenly looks like Doximity (DOCS 0.97%) -- like so many other pandemic-era growth stories -- falls in the former category.
I don't say this simply because its shares plunged more than 20% after recent earnings, putting it in camp with quite a few other small stocks that haven't held up so well during this summer's earnings season. Rather, it looks like management was really out of touch when touting their ambitious growth plans.
Here's what investors need to know.
Hyperfocus on its niche turns against Doximity
Let's cut right to the chase here and consider the main issue: financial guidance. Just two months after its investor day and calling for an average annual revenue growth rate of 20% through 2028, management severely revised revenue guidance for its fiscal 2024 (the 12 months that will end in March 2024) down to just -- wait for it -- 10% at the midpoint.
The new outlook is for revenue to be in the range of $452 million to $468 million, down from the prior outlook of $500 million to $506 million. Ouch! I'll reiterate, this is just two months after touting its ability to upsell software services to the myriad of doctors, physicians, and healthcare companies that use its Doximity app -- often referred to as "the LinkedIn for medical professionals."
A chart from Doximity's June 2023 Investor Day showing its expectation for 20% average annual sales growth over the next four years. Image source: Doximity. CAGR = compound annual growth rate.
You see, much of this business' sales come from advertising campaigns on its app (including all of the top 20 pharmaceutical and hospital giants). Doximity says its customers get exceptional return on investment from marketing on the app, and the company has historically turned that into upsell opportunities for more marketing -- and, more recently, the upsell of app extensions like video conferencing and e-signature.
We already knew that marketing campaign budgets were under pressure this year, as that's often the first budgetary item cut when the economy slows. But that's not the issue here. Co-founder and CEO Jeff Tangey explained on the earnings call:
It's the friction of our full-service, white-glove sales model. Simply put, during summer upsell season, clients no longer have the time to schedule all of the meetings, legal reviews, reports, and [quarterly business reviews]. Post COVID, they work from home most of the week, and they'd rather log in to a self-service platform 24/7 to monitor their program results and set budgets.
In other words, the one-on-one high-touch service that has gotten Doximity to this point isn't working anymore. As Tangey further explained, customers "want to expand and adjust their programs onto Doximity with the click of a button, just like they would on LinkedIn, Facebook, Amazon, or Google." Automation is the future, and the company is scrambling to get a self-service portal up and running for all its customers.
Time to sell?
The recent revision surprises me in more ways than one. Sure, it's the quick about-face on full-year guidance. But as the healthcare system pivots to digital tools, it seems like the need for an automated self-service system would have been more obvious.
At any rate, the revision downwards is quite large. Interestingly, the long-term guide through 2028 was reiterated, but I believe that needs to be tossed into the "hopes and dreams" file versus the "realistic expectations" one at this point. D
On the positive side, Doximity is still growing modestly, it's highly profitable, has $873 million in cash and short-term investments and no debt, and will be completing the $233 million in share buybacks currently authorized.
However, the shares currently trade for about 24 times the expected full-year adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). Given the lowered financials, it doesn't look particularly cheap for a small and low-growth business.
All of that aside, though, it appears Doximity was in the right place at the right time for the pandemic-era push into digital workflows but it is not executing as was hoped on its opportunity. It's time to shorten the leash on this one. If things don't improve soon, I'll be selling.
