2023-06-21 05:16:03 ET
Summary
- Doximity's recent Investor Day showcased platform enhancements and long-term financial targets, including achieving $1 billion in revenue and adjusted EBITDA margins of 45% or higher by FY28.
- The company plans to capture a larger share of the digital marketing landscape, expand product offerings, and deepen relationships with top customers.
- I am bullish on Doximity, Inc. with an end-of-year price target of $42.
Investment Thesis
I am bullish on Doximity, Inc. ( DOCS ) with an end-of-year price target of $42. The company's recent Investor Day showcased platform enhancements and provided long-term financial targets. With its high ROIs, Doximity is well-positioned to gain market share, aligning with management's FY28 targets of achieving $1 billion in revenue and adjusted EBITDA margins of 45% or higher. While short-term execution remains important, I perceive Doximity's current valuation as an attractive buying opportunity relative to its favorable long-term outlook.
Fourth Quarter Review and Outlook
DOCS released its fourth-quarter results in May. The company's revenue visibility for the next fiscal year (FY24) is higher, with over 65% of revenues expected to come from subscriptions, compared to 60%+ in FY23. It's worth noting that the company anticipates a smaller portion of subscription revenue (5%-7%) to come from midyear upsells, down from 10%-12% last year. This conservative outlook sets a reachable target for FY24, allowing management to continue their trend of exceeding expectations. Given these factors, I view any decline in the company's stock as a buying opportunity. DOCS has introduced new modules, such as point of care marketing, which has expanded their marketing budgets. However, there has been increased scrutiny in the approval processes for these budgets, leading to delays in revenue recognition in the past. Fortunately, management has disclosed that all but one client has now approved the new offering, indicating that the company can overcome the revenue recognition challenges. Additionally, DOCS has integrated with MEDITECH, the third largest Electronic Health Record [EHR] system based on the number of beds. This integration complements the existing integrations with Epic and Cerner, covering 85% of hospital beds. With this integration, physicians using MEDITECH's app called Expanse Now can easily access Doximity Dialer's voice or video communication features. I believe these integrations will drive increased demand for the dialer solution among physicians working in facilities that use MEDITECH, leading to higher engagement and supporting DOCS' strong return on investment.
Strength of the Platform Highlighted in Investor Day
During the company's recent Investor Day , DOCS management emphasized the positive reception of their key products among physicians, leading to increased efficiency. The management highlighted three solutions: Newsfeed, Workflow, and Dialer. The Newsfeed solution delivers tailored news to physicians based on patient populations and practices, ensuring a balanced perspective with one sponsored ad for every 12 cards in the newsfeed. The Workflow solution digitizes workflows, including digital fax and signature tools. The Dialer tool, which is widely favored by customers, allows physicians to call patients with a single click and enables patients to schedule appointments through text message links. DOCS disclosed that they have over 500,000 active workflow providers, serving approximately 40% of physicians with their workflow tools. Regarding artificial intelligence [AI], DOCS mentioned that their AI model, DOCS GPT, receives thousands of prompts from clinicians each week. The management believes that this presents additional opportunities for expansion.
DOCS Provided Long-Term Targets of $1 billion+ in Revenue in FY28 with 20%+ Topline Growth
DOCS reaffirmed its FY24 guidance, stating that a significant portion of revenue is already contracted, with renewals, upsells, and new customers contributing to the rest. DOCS has a long-term vision to achieve annual revenue growth of 20% and reach $1 billion in FY28. This growth will be driven by three key factors. Firstly, there is a shift in marketing expenditure from in-person to digital platforms, and DOCS aims to capture a larger market share within this growing digital landscape. Secondly, the company sees opportunities for product expansion, specifically with the recent introduction of peer-to-peer and point-of-care marketing modules. These new offerings provide avenues for further revenue growth. Lastly, DOCS aims to deepen its relationship with top customers, expecting the number of 8-figure customers to increase from the current 11 to 20-25 by FY28, further contributing to revenue expansion.
The projected revenue composition for FY28 includes core modules accounting for 80% of revenue, with strong growth expected. Another 15% is expected from peer-to-peer and point-of-care modules, which have already gained approval from all customers and are experiencing strong adoption. The remaining 5% is projected to come from new businesses and workflow innovations. DOCS aims to increase its adjusted EBITDA margin modestly, with achievable targets supported by expected gross margin ranges. The long-term framework is seen as favorable, potentially supporting a higher valuation. In addition, DOCS announced a $200 million share buyback program and intends to use the remaining cash for potential mergers and acquisitions, particularly in the workflow space.
Valuation
My end-of-the-year price target of $42 is based on an EV/revenue valuation methodology, as I believe this methodology allows for consistent comparison across Software-as-a-Service (SaaS) companies. I believe DOCS trades at a premium due to its combination of rapid growth and high profitability. SaaS companies like Doximity have historically traded at 5-15x forward-year revenue multiples, but certain companies have traded above the high end of the range, mostly due to growth becoming more durable at higher levels of scale. DOCS is trading in the mid-range of its peers, and I believe Doximity's valuation multiple will expand once investors better understand its medium-term growth potential. I base my price target on a 12x forward multiple and 2024 revenue estimate .
Risks to Thesis
There are several risks to investing in DOCS. Doximity operates in a market where it is relatively easy for users to switch platforms. Although the company currently has a strong competitive advantage due to its large user base of physicians, these physicians could switch to other platforms without much difficulty. A potential challenge for Doximity's core marketing solutions segment is the decrease in revenue opportunities caused by a declining number of patented pharmaceuticals. The majority of marketing spending by pharmaceutical companies on the Doximity platform is focused on promoting newer drugs that are still under patent protection. If the number of drugs under patent declines, there will likely be a reduced need for high levels of marketing expenditure to promote these newer treatment options.
Conclusion
During the recent Investor Day, Doximity showcased improvements to its platform and provided long-term financial targets. DOCS plan to capture a larger share of the digital marketing landscape, expand product offerings such as peer-to-peer and point-of-care modules, and deepen relationships with top customers. I believe that Doximity's current valuation presents an attractive buying opportunity considering its promising long-term prospects. I have an end-of-year price target of $42 on the stock based on a forward EV/Sale multiple of 12x applied to the 2024 revenue estimate.
For further details see:
Doximity: Digital Health Play With Strong Fundamentals