Doximity: Preparing for Strong Growth

Tech stocks are among the stocks that have underperformed this year. This also includes high-growth health-tech stocks like Doximity (DOCS), even after those two years of the COVID-19 pandemic, which is no longer the trigger due to the war in Ukraine. 

That’s why shares of healthcare information services provider Doximity are down more than 5% in the past year, while its financial position appears stable and the company’s future is bright. Thus, I am bullish on this stock. 

Doximity’s Business

Doximity owns and operates a digital platform for physicians of all specialties and occupations to enable these healthcare professionals (80% of whom are based in the U.S.) to use critical resources related to their profession.

Specifically, the platform allows them to collaborate with other physicians, receive the latest medical news and research, access valuable career support, and visit patients virtually.

Doximity’s Latest Earnings Results

The third quarter of Fiscal 2022 was strong, according to the company, due to the high net revenue retention rate and strong growth of the telemedicine platform with an additional 350,000 active providers.

The acquisition of a web-based and mobile app to schedule calls and messages for hospitals and doctors also helped the company grow.

Thus, the company posted a 420% year-over-year increase in earnings per diluted share of $0.26, topping the average estimate of analysts by $0.16, for a 160% positive surprise.

The growth was accompanied by a 67% year-over-year increase in revenue to $97.9 million.

EBITDA increased 119% to $47 million in the third quarter of fiscal 2022 from $21.5 million in the prior-year quarter. This resulted in a 110% basis point improvement in the EBITDA margin to 48% of total revenues for the quarter.

Finally, the 13.8% increase in operating cash flow to $27.3 million and the 11.8% increase in free cash flow to $25.6 million were relevant, with both benefits calculated year-over-year.

Balance Sheet

As of December 30, 2021, the balance sheet reported cash and short-term investments of $765.6 million versus a debt obligation of approximately $1.6 million on operating lease liabilities.

The balance sheet is solid, as also evidenced by the Altman Z-Score of 63.9. 

For beginners, the Altman Z-Score indicates whether the probability that a company can fail within a few years is high, low, or non-existent. A value greater than or equal to 3 indicates that the company is in the “safe zone,” from a financial point of view, such that the probability of bankruptcy is extremely low or non-existent.

Additionally, Doximity’s weighted average cost of capital of 8.8% is materially lower than Doximity’s return on invested capital of 19.1%. 

This means that Doximity can generate a higher return on each investment than the cost of financing the investment. In terms of this equation, a company that expects a sustained positive excess return for any additional investment in the future will increase in value as it continues to grow.

Doximity’s Guidance for Fiscal Q4 and Fiscal 2022

For the fourth quarter (ended March 31, 2022) of Fiscal 2022, the company expects revenue of $89 million to $90 million. Meanwhile, EBITDA is expected to be in the $34 million to $35 million range.

For the full fiscal year, the company expects revenue to range between $338.9 million and $339.9 million, while EBITDA will range between $144.9 million and $145.9 million.

Growth Catalysts

Health is critical in modern society based on consumption as, with the reduction in the number of births, a larger base of consumers has to be guaranteed.

Therefore, as the population ages, every effort must be made to improve people’s living standards and increase life expectancy.

The market demands that doctors provide better patient care and keep healthcare costs as low as possible.

In this regard, the service provided by Doximity and other operators in the U.S. and internationally becomes critical as it increases the efficiency of the healthcare system, which also has a positive impact on a country’s gross domestic product.

Doximity is capitalizing on the opportunities in the growing healthcare information services market. Both the net revenue retention rate and the number of customers who spent more than $100,000 in subscriptions in the last 12 months are showing an upward trend, according to the earnings report by Doximity.

The revenue retention rate and the number of customers that spend over $100,000 in subscriptions yearly are key indicators of Doximity’s business size.

Growth Expectations

According to analysts, earnings for the company are estimated to grow at a 1.7% CAGR from now until March 2024. On the other hand, revenue is expected to increase from $316.6 million to $583.35 million in the same period.

Wall Street’s Take

In the past three months, 11 Wall Street analysts have issued a 12-month price target for DOCS. The company has a Strong Buy consensus rating based on nine Buys, two Holds, and zero Sell ratings.

The average Doximity price target is $67.82, implying 34.8% upside potential.

Valuation and Technicals 

Shares are changing hands at $50.31 as of the writing of this article, for a market cap of $9.63 billion, a P/E ratio of 76.5, and a 52-week range of $39.92 to $107.79. 

The stock has a price/book ratio of 11.5, a price-sales ratio of 30.4, a price-to-cash-flow ratio of 82.2, and a price-to-free-cash-flow ratio of 82.9. 

Based on the indicators just mentioned, the stock is not cheap, but when its stock price is compared to the 50-day moving average of $52.34 and the 200-day moving average of $62.39, the idea is that these valuations might represent an interesting entry point anyway, especially given the growth potential ahead.

Conclusion

The company’s stock has fallen so far this year, but a lot is going on that perfectly matches the market need in a consumer-oriented society. 

As soon as the headwinds from the crisis in Eastern Europe ease, shares are poised for a strong recovery.

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