Most stocks suffering a 70% decline in share price tend not to qualify as anything close to a cash cow capable of generating immense free cash flow (FCF). But Doximity (DOCS 0.97%), with its digital platform for healthcare professionals, is the exception to this theory, with a top-tier gross profit around 90% and FCF margins of 35%.
So, does the 70% decline in share price indicate there is something fundamentally wrong with the business, leaving this immense cash generation at risk? Or could this be an opportunity for patient investors?
Here's why I'm thinking it'd be the latter.
Doximity: The go-to app for healthcare professionals
Doximity has widespread adoption among healthcare professionals: Its members include over 80% of U.S. physicians, 50% of nurse practitioners and physician assistants, and 90% of graduating medical students. This makes it something of a LinkedIn for healthcare professionals.
The company serves its members through an array of services, such as:
- In telehealth, it provides anonymized video- and voice-calling capabilities for doctors through Doximity's Dialer product.
- A curated news feed for clinicians that keeps healthcare professionals updated on personalized news, clinical data, and research.
- Doximity's mass adoption creates a massive professional network that can be used for collaboration and communication.
- It provides recommended jobs, a salary map, hospital reviews, career preferences, and a residency navigator, giving its members valuable transparency in the healthcare job market.
- Doximity facilitates messaging, digital faxes, and e-signatures among healthcare professionals, helping to reduce burnout from physical paperwork.
- Following its 2022 acquisition of Amion, Doximity now helps physicians set schedules, whether at the team level or for a whole enterprise.
Thanks to the combination of these uses, Doximity has over 560,000 active prescribers on its platform. Considering that the total U.S. physician population is just over 1 million, according to Statista, this figure is amazing.
In its most recent quarter, Doximity reached new all-time highs in daily active users. That makes its app valuable territory for marketers at pharmaceutical companies and healthcare systems. All 20 of the largest hospitals and healthcare systems and all 20 of the biggest pharmaceutical companies advertise with Doximity.
This access to all these doctors on the company's app has advertisers quickly shifting their budgets from traditional marketing. The company has seen its revenue rise 126% in the 2 1/2 years since its initial public offering (IPO).
But this shift in marketing spending isn't merely a result of advertisers following where doctors spend time. Doximity also has best-in-class return on investment (ROI). Chief executive officer Jeffrey Tangney said, "When our clients sat down at the end of the year to do their annual reviews of all the programs and all the partners that they work with, again, they're telling us that we win in terms of ROI."
The icing on the cake for investors: Despite already working with the 20 largest pharmaceutical companies and healthcare systems, Doximity has a growth story that should still be in its early chapters. It holds less than a 5% market share among prescription brands that have over $100 million in sales across the U.S. So there is ample room for the company to grow alongside its largest customers.
Phenomenal margins help make Doximity a cash cow
With a gross profit margin of 91% and a net profit margin of 35%, Doximity has one of the best margin profiles in the stock market.
DOCS gross profit margin (quarterly) data by YCharts.
If Doximity were large enough to qualify for the S&P 500 index, its gross and net profit margins would rank as the ninth and 20th best, respectively.
This high net income margin is all the more striking because Doximity historically converts all of it to free cash flow.
DOCS free cash flow data by YCharts; TTM = trailing 12 months.
Doximity still generates an FCF margin of 27% even after accounting for rather generous stock-based compensation. This outsize FCF generation -- and a cash balance of over $700 million -- allowed the company to lower its share count by 4% over the last year and could easily fund similar stock buybacks for years to come.
These outstanding margins could be an early indicator of what could prove to be a wide moat surrounding Doximity's operations, thanks partly to its unmatched reach in the healthcare professional community.
Doximity's leadership position and best-in-class advertising ROI look fairly priced with its enterprise value-to-FCF ratio of 29 (which is being used here instead of its price-to-FCF ratio of 38, due to the company's $700 million in net cash).
The company is consistently taking market share in a digital healthcare industry expected to grow by 5% to 7% in 2024. So Doximity's stock, after its fall from grace since its IPO, looks like an intriguing opportunity for investors thinking decades ahead.
