2023-08-09 05:08:44 ET
Summary
- Doximity's challenging outlook casts doubt on its status as a high-growth company.
- DOCS stock is likely to trend lower as growth-focused shareholders exit and value-oriented investors enter.
- The downward revision of revenue growth rates positions Doximity as an "ex-growth" company with a questionable valuation.
Investment Thesis
Doximity ( DOCS ) delivers a tough outlook. As we headed into the earnings call there was doubt over its underlying prospects as a high-flying growth company, however, this set of results firmly puts Doximity in the penalty box.
Over the next several months we'll see the stock trend lower as its growth-minded shareholder base rotates out of the stock and a new value-oriented profitability-focused investor enters when they find the stock trading in the bargain basement.
For now, I'm forced to issue a sell rating on DOCS.
Rapid Recall,
In my previous analysis , I said,
Doximity's guidance for fiscal Q1 2024 points to approximately $108 million at the high end. This is lower than the $112 million that analysts had been expecting to see. Meaning that rather than Q1 2023 growing at around 23% y/y, the high end of Doximity's guidance in actuality points to 19% y/y growth rates.
The problem for investors then is not so much what will fiscal Q1 2024 grow at, but rather, how much confidence can investors seriously have that Doximity will meet its fiscal 2024 targets.
The answer to that question we now know. Not a whole lot of confidence.
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 began as the "LinkedIn for doctors," but it quickly advanced and aimed to provide greater ROI to its users by focusing on facilitating interactions with other doctors. Rather than only serving as a platform for doctors to list their qualifications.
However, its net retention rates put into question just how successful Doximity's ability to upsell are in actuality.
As you can see above, Doximity's net retention rates were too high in the past. Allow to me explain.
I've made the case to followers of my work, that it's vastly better for companies to seek to provide more value to the end customer rather than seeking to charge more for the same value.
Allow me to provide an example. What do Netflix ( NFLX ) and Amazon ( AMZN ) and YouTube ( GOOG ) have in common? Asides from being massively successful businesses, they all want users on their platforms as much as possible. Amazon wants you to shop there all the time, but they are not seeking to charge you a high premium for the convenience they offer, they even allow you to watch movies for free! Same with Netflix, they want consumers binging on their platform, but they don't want to charge you per ''value'' or per show watched.
And that's where Doximity failed. Its net retention rates were so high in 2022, this led to a slowdown in its customer adoption curve.
What follows is Doximity's trailing twelve months' customers spending more than $100+ annually adoption curve, see if you see a pattern:
- March 2022: +35% y/y
- March 2023: +16% y/y
- June 2023: +12% y/y
Revenue Growth Rates Fizzling Out
There are not many rules when it comes to investing in a growth company. The story is always compelling and tightly woven with a promise of jam tomorrow.
But what the company cannot do, under any circumstances, is downwards revise its revenue growth rates. Investors can forgive many things, but for a growth company to adopt this cardinal sin, can only mean one thing, that growth company is going to become ''ex-growth''.
Here's the context. Together with its fiscal Q4 2023 results, Doximity guided for full-year fiscal 2024 to see revenues of around $506 million. This would have seen its revenue growth rates grow by 21% y/y. While not that exciting, it was certainly passable.
Indeed, investors would have inevitably been hoping that Doximity would upwards revise its full-year outlook together with its fiscal Q1 2024 results and there would be a unanimous cheer from investors. However, the problem here is that not only did Doximity not upwards revise its revenue growth rates, it didn't even reaffirm its outlook provided back in May.
Instead, Doximity downwards revised its fiscal 2024 revenue outlook to around $468 million, or now pointing to 12% y/y CAGR at the high end.
For a market that is already highly jittery, this is bad news at a bad time. Naturally, analysts during were also taken by surprise and sought to ask management the following question,
And then just one more on the revised outlook here. Anna, just in terms of the sort of expected cadence, should we still look for 3Q to show a bit of a quarterly growth relative to the second quarter?
And if so, if you are expecting that bump in 3Q, excuse me, what would kind of give you the confidence that you can achieve that, just given some of these moving parts here this year?
This led Doximity's management to reply,
So if we're looking at this calendar year, the second half only implies about 5% growth versus the first half. And for comparison, last year, it was about 18% growth.
One way or another, this guidance cements Doximity as no longer a growth company. And the problem with Doximity becoming ''ex-growth'' is that investors will be acutely focused on its underlying profitability to support its valuation.
Valuation -- Found in No-Man's Land
The bull case for Doximity is that it holds around $860 million of cash and nil debt. This means that around 16% of its market cap is made up of cash.
The bear case here is that investors are being asked to pay around 25x this year's free cash flow for a business that is growing at around 10% to 12% on a go-forward basis.
When paying around 25x free cash flows, there are plenty of other companies that have ''clean'' stories and operate blemish-free.
Consequentially, I believe the stock is in no-man's land. Not growing fast enough for growth investors. And not cheap enough for value investors.
The Bottom Line
Doximity has presented a challenging outlook, casting doubt on its status as a high-growth company.
These results have placed Doximity in a tough spot, causing a shift in its investor base from growth-focused shareholders to value-oriented ones.
Over the next few months, a downward trend in the stock seems likely as its trajectory shifts.
The recent financials indicate a diminished growth potential, leading to uncertainty in its prospects and a questionable valuation
Moreover, the downward revision of its revenue growth rates has positioned Doximity as an "ex-growth" company, amplifying the need for a strong underlying profitability to support its valuation. The complex interplay of these factors places the stock in a challenging position, too slow for growth investors and too rich for value investors.
For further details see:
Doximity Earnings: Too Many Problems, Sell