Doximity stock is now severely undervalued as future prospects remain strong

Tech companies have generally disappointed investors in the post-pandemic landscape, with many experiencing significant deceleration in their growth rates. For some formerly high-growth tech firms, they no longer qualify as high-growth companies, leading to significant declines in their stock prices.

One tech company that has disappointed investors post-pandemic is Doximity ($DOCS), a social media platform designed for medical professionals. In August, the company released its Q2 earnings results (Q1 FY24 earnings based on Doximity's fiscal year), which exceeded estimates on both the top and bottom lines. However, the company lowered its guidance for the fifth consecutive quarter, and as expected, investors punished the stock by sending it down 22% post-earnings.

For the year, Doximity has fallen 33%, significantly underperforming the broader market and other tech companies. Yet, this year's poor performance has created an opportunity as the company seems to be undervalued. Despite some execution missteps that resulted in market share losses, Doximity remains the largest digital network of medical pros in the US. It delivers great ROI to advertisers and is very profitable. Here's why this year's plunge offers a compelling buying opportunity for long-term investors.

The Most Popular Digital Marketing Platform for Pharma Companies and Health Systems

Doximity was founded in 2010 by Jeff Tangney and Nate Gross. Unlike many tech startups that targeted the consumer market, Doximity set its sights on an entirely different sector: healthcare. The platform aimed to connect healthcare pros, facilitating communication, sharing of knowledge, and collaboration in the medical community.

This strategic choice laid the foundation for Doximity's growth. The healthcare industry, traditionally slow to adapt to digital transformation, was in need of a platform that catered to the specific needs of healthcare providers. In this space, Doximity introduced secure, HIPAA-compliant communication tools, comprehensive professional profiles, and an extensive network where physicians and other healthcare professionals could connect, share insights, and collaborate.

DOCS experienced hyper-growth over the past decade and managed to connect over 80% of all US physicians and a significant number of nurse practitioners, physician assistants, and other medical professionals. This extensive network has turned Doximity into a powerhouse of healthcare data, insights, and communication.

With such a vast network, the company saw multiple opportunities. It expanded into telehealth, providing a robust infrastructure for online medical consultations. The COVID-19 pandemic accelerated the adoption of telehealth, and Doximity was perfectly positioned to benefit from this shift. The company successfully captured market share, achieving a compound annual growth rate (CAGR) of over 40% between 2018 and 2023.

The company grew rapidly thanks to the huge ROI it delivered to customers. For example, pharma company IQVIA Holdings ($IQV) achieved an ROI of 11:1, while company LexisNexis reported an ROI of 17:1. These high ROIs are not the exception but the norm. The median ROI achieved by Doximity customers is 10:1 for pharma clients and 13:1 for hospital clients, which are very high ROIs that make Doximity a very attractive digital platform for advertisers. This is why all of the top 20 pharma companies and top 20 hospitals are Doximity clients.

Deep Profits But Solwing Growth

While Doximity continues to deliver best-in-class ROI to customers, it has faced challenges due to macro uncertainties affecting its clients' marketing budgets. Also, it seems that client preferences are evolving, with pharma companies increasingly seeking self-service digital marketing solutions.

Historically, Doximity followed a high-touch go-to-market strategy, primarily targeting large deals through negotiations with significant clients. However, clients are now seeking more efficient and self-serve solutions. The absence of a self-serve marketing platform negatively impacted Doximity's business in Q2, leading to a loss of market share to competitors offering more user-friendly platforms. Competing companies in this space include The Rounds, another network for healthcare professionals, as well as healthcare media companies like Healio and Medical Economics.

To address these competitive challenges, Doximity introduced a new self-serve ad platform in Q1 FY24, providing clients and agencies with an efficient means of managing their programs and budgets. This platform closely resembles other digital ad platforms such as LinkedIn, Facebook, Amazon, and Google, aiming to meet customer demands for rapid deployment, adjustments, and automation. Initial pilots with hospital clients have yielded positive results, resulting in higher client satisfaction, which is a positive sign that Doximity can regain momentum.

Revenue growth has slowed down in recent quarters due to macroeconomic uncertainty and increased competitive pressures. In Q1 FY24, revenue grew by 20% to $108.5 million, a solid growth rate. However, the Q2 guidance suggests revenue growth of only 6.8% y/y. The company also halved its full-year growth outlook in Q1, from 20% to 10%, highlighting its near-term growth challenges.

Despite these growth issues, Doximity is still well-positioned to thrive over the long run. It remains the most popular digital platform for healthcare professionals in the U.S. As ad budgets shift online, Doximity is well-positioned to capture a significant market share, given its leading position. And the introduction of the new self-service platform is likely to attract more clients to Doximity, potentially accelerating the company's growth in 2024.

Doximity is also a highly profitable business, providing financial flexibility to invest in its future growth. In Q1, the company achieved an adjusted profit margin of 42.9%, compared to a 37% margin in the year-ago quarter, highlighting its improving operating leverage. Today, Doximity is one of the most profitable software companies on the market. Also, its Free Cash Flow increased by 31% y/y in Q1, outpacing revenue growth, and underscoring its strong financial performance.

What About Valuation

Doximity has disappointed investors by cutting its FY24 outlook in half but this year’s selloff seems to be overdone. At current prices of around $22, the company trades at a Price to Free Cash Flow (P/FCF) multiple of 22.8x. This multiple is much lower than the multiples of other software companies with a similar growth and profitability profile, such as Intuit ($INTU) and Adobe ($ADBE).

If Doximity outperforms in the upcoming quarters, the P/FCF multiple could experience significant upside potential. Assuming the P/FCF rises to 30x, aligning with Intuit's multiple, and the FCF margin remains around 51%, DOCS stock can rise 60% from current prices, reaching $35 by the end of its fiscal year in March 2024.

What Else

Doximity may have underperformed lately, but its long-term growth prospects remain robust. The company's position as a leading player in the healthcare technology landscape, with a vast network of healthcare pros will continue to attract more advertisers to its platform. Doximity’s continued innovation, and expanding suite of services, can help the company accelerate its growth in 2024 and beyond.

At current prices, DOCS appears undervalued, given its deep profits and promising growth potential.

DOXIMITY RATING

Short Term: Buy

Long Term: Buy

🎯 FY24 Price Target: $35

I’ve no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.