Having been a publicly traded corporation for two years, Doximity (DOCS 0.97%) -- an online networking platform for medical professionals -- hasn't delivered great returns in this period, far from it. And nothing has improved this year, even as the broader stock market is doing much better than in 2022. Doximity's shares are down by 39% since 2023 started.
Several things are weighing down on the company. But there are several good reasons why a longer-term investors might want to take a closer look. Let's examine some of those reasons.
Its rich valuation could be an issue
The first concern some investors may have is valuation. Doximity's stock price has looked expensive even after its recent poor performances -- sporting a forward price-to-earnings (P/E) ratio of about 26 and forward price-to-sales (P/S) ratio of 8.7. By contrast, the average forward P/E for the healthcare sector is 17.2, while a forward P/S multiple of 2 or under is typically considered good.
DOCS PE Ratio (Forward) data by YCharts.
Second, Doximity's revenue and earnings-growth rates have dropped recently, a big no-no for richly valued growth stocks. For such companies, failing to live up to investors' lofty expectations often results in their share prices falling off a cliff -- precisely what happened to Doximity.
DOCS Revenue (Quarterly YoY Growth) data by YCharts.
This business looks promising
Still, there are reasons to be optimistic about the company's future.
Most companies that survive the test of time do so by building an economic moat that protects them from the competition -- and indeed, Doximity benefits from one. Here is how it works. Though many online networking platforms exist, the company caters specifically to medical professionals. Websites like LinkedIn aren't exactly substitutes for Doximity since the company offers services beyond networking and job searching.
Physicians can also use the app to read the latest news and research in their fields, conduct telemedicine visits with patients, etc. These functionalities make the platform attractive to hospitals, health systems, and pharmaceutical companies looking to communicate directly with physicians to advertise job openings or brand-new medicines (doctors control a good deal of healthcare spending). That's how Doximity makes its money.
It charges fees to health systems and drugmakers. The more that physicians join the platform, the more it becomes attractive to other medical professionals and third parties looking to advertise directly to them. In other words, Doximity benefits from the network effect. The company estimates that the top 20 hospitals, health systems, and the top 20 pharmaceutical companies use its platform. It has also managed to attract more than 80% of U.S. physicians.
Here's another selling point Doximity offers that should allow it to grow its ecosystem: The company helps increase physician productivity. Consider Doximity's attempt to replace the old-school fax machine as the dominant method of communication for things like medical records. On the one hand, the reliance on fax makes sense when sending documents with highly sensitive and personal patient information. Documents sent via fax are more secure than emails.
Also, it's easy to miss an email (as most people have experienced), whereas a fax document is automatically printed. Still, emails are easy and convenient to send. Doximity's secure digital-fax system complete with notifications and e-signature capabilities, is the best of both worlds. It avoids the hassle of relying on a fax machine, saving time and money. Yet, the company estimates that 80% of healthcare documents in the U.S. are still sent through the mail or fax.
There is room for improvement here. In another initiative, Doximity recently hopped onto the generative artificial intelligence bandwagon by releasing DocsGPT, an AI-powered chatbot to help reduce the time physicians spend doing administrative paperwork. Doximity's commitment to helping improve the efficiency and productivity of physicians is a major green flag for the company's future.
Plenty of room to grow
While Doximity's revenue growth has slowed recently, the business is profitable and boasts excellent gross margins above 80%.
DOCS Revenue (TTM) data by YCharts.
Doximity also estimates a $18.5 billion total addressable market, which dwarfs its trailing-12-month revenue of almost $437 million. While valuation is an issue and could cause Doximity's stock to be volatile in the short run, the company's economic moat and growth opportunities make it an excellent stock to buy and hold over a decade.
