DOCS

Doximity, Inc.

34.82
USD
-7.22%
34.82
USD
-7.22%
27.06 107.79
52 weeks
52 weeks

Mkt Cap 3.67B

Shares Out 105.30M

Chat
Send me real-time posts from this site at my email

Doximity: Slowing Guidance, Stock Drops, But It Oozes Cash Flows

Summary Doximity's guidance for the year ahead, somewhat as expected, is expected to slow down. The crown jewel of this investment thesis is that Doximity is a free cash flow printing machine. Doximity notes that it's only 3% penetrated into its TAM. DOCS is not expensive, with the stock priced at approximately 32x this year's cash flows. As always, happy to discuss my thesis further in the comments section. Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Learn More » Investment Thesis In my previous article, I said, On the back of its recent results, I believe that I'm allowed to tap myself on the back after making a good call. But I'm now reversing this call and sticking a buy rating on it. There's a lot here to like about this company, particularly at this valuation. Doximity finished fiscal 2022 by reporting 45% y/y growth rates. What's more, Doximity now guides for 34% y/y growth rates for the year ahead, thereby leaving much to be desired. Even if we allow for Doximity to be lowballing estimates, to allow for easy beats throughout the year and Doximity ultimately grows its revenues by 40% y/y in fiscal 2023, we are still eyeing up a young business with decelerating growth rates. It's not a deal-breaker, but it is bad news at a time when the market is shaky, and unstable, with countless high growth names that have been shot out of the hair on valuation concerns. That's the end of the bad news. The growth is slowing, somewhat. Now, let's dig into what's to like here. Doximity's Near-Term Prospects Doximity has its name because it creates proximity for physicians. Doximity is a cloud-based platform that allows physicians to collaborate with their colleagues, coordinate patient care, read medical news and research, and manage their careers by looking for job postings. Doximity's clients are pharma companies and hospitals. Doximity allows clients to connect with physicians about new treatments and patient referrals. And the company boasts of providing its clients with incredibly high ROIs. And that makes sense, given that approximately 95% of its revenues are subscription-based, from clients that stick around, and the remaining 5% are new clients adopting the platform. In other words, Doximity has very high penetration among US healthcare professionals, reaching more than 80% of US physicians. During the earnings call, Doximity highlighted to investors that it's only 3% penetrated into its total addressable market. Noting that Doximity gets around 5% of mega brand's health care professional marketing budgets. While declaring that Doximity is actually growing faster into mid-tier pharma brands, as these companies are forced to be ''more agile, more digital, [a] more team-based approach to sales and marketing'' and lean further into digital platforms to connect digital marketers with frontline sales teams. All in all, there's no doubt that there's a very attractive narrative here, which doesn't stack up with the after-hours sell-off. Bull Case: Very Strong Profitability The crown of this investment is that the business is highly profitable. That being said, consider the following trend in operating margins: Q4 2021 34% Q1 2022: 34% Q2 2022: 32% Q3 2022: 38% Q4 2022: 30% Not only has Q4 2022 dipped substantially from Q3 2022, but it has also seen its operating margins compress by slightly more than 400 basis points y/y. That being said, if I was a shareholder here, that wouldn't be a reason for me to throw in the towel here. You should be reminded here that this is GAAP operating margin. So, it's after stock-based compensation! Incidentally, I should remark that I have used operating margins because the company describes its improved profitability in terms of net income, which in the recently reported quarter, adds back taxes, which is a non-recurring event, and not indicative of the business's future earnings power. Furthermore, Doximity's guidance for fiscal 2023 as a whole, points to its EBITDA margins reaching 43%, which is consistent with the 44% EBITDA margins reported in fiscal 2022. Consequently, not only is the business highly profitable after stock-based compensation, but the guidance for the year ahead reaffirms that it has very strong profitability, that is here to stay. Early 2021, the market was much more inclined to price anchor to other stocks on a P/sales base, and that was enough of an investment strategy. And that strategy had worked reasonably well. Presently, the market is much more considerate towards businesses' ability to grow sustainable cash flows. On that basis, Doximity shines brightly. That being said, here are some back-of-the-envelope calculations. Doximity's cash flows from operations for fiscal 2022 were reported at $126 million. If we presume that Doximity has a robust year ahead and see its cash flows from operations grow by 50% y/y to as much as $190 million for the year, that puts the stock priced at 32x this year's cash flows. That's really not an expensive valuation right now. When it comes to considering investing in Doximity, I'm inclined to believe that this is a very reasonable entry point. I don't imagine that you are going to get a business growing at a high 30s% CAGR, priced much cheaper than 32x cash flows, irrespective of the market environment. High-quality companies simply don't stay on a sale for very long. Personally, I'm inclined to bargain hunt more as I'm now finding things with a few hairs on them priced at 10x free cash flow. And Doximity is very far from being priced that cheaply. So, it ultimately boils down to knowing exactly what sort of investor you are. It's not about thoughtlessly buying the dip but knowing what sort of business makes sense for you to own in your portfolio. Whatever you decide, good luck and happy investing. Strong Investment Potential My Marketplace highlights a portfolio of undervalued investment opportunities - stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued. I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks. Investing Made EASY As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains. Deep Value Returns' Marketplace continues to rapidly grow. Check out members' reviews. High-quality, actionable insightful stock picks. The place where value is everything. This article was written by THANK YOU for all the help that everyone has so kindly offered me, in how to think about businesses from different perspectives. DEEP VALUE RETURNS: The only Marketplace with real performance. There are no gimmicks and no place to hide because all I care about is delivering high performance against the S&P500. WARNING: Any stocks that you feel like buying after discussions with me are your responsibility. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue