2023-08-24 00:13:11 ET
Summary
- Doximity's revenue growth and EBITDA exceeded estimates but lowered revenue growth guidance.
- I downgraded DOCS stock rating to hold due to near-term performance concerns.
- I still maintain a positive long-term outlook that the business can reach $1 billion in revenue by FY28, but the market is likely focusing on the near term.
Investment action
I recommended a buy rating for Doximity ( DOCS ) when I wrote about it the last time , as I expected the business to meet the revised guidance and possibly beat it if the macro turns for the better. Based on my current outlook and analysis of DOCS, I am downgrading my buy rating to a hold as I expect investors to focus on the near-term performance, which is expected to be weak.
Review
Having reviewed DOCS's 1Q24 financial results , I have decided to lower my recommendation from buy to hold. Financial results were excellent, with DOCS reporting revenue growth of 20% to $108 million and EBITDA of $47 million, both of which were ahead of consensus estimates. However, the company's revenue growth guidance was lowered as a result of significantly lower bookings caused by both large and minor shifts in the marketing priorities of customers. Specifically, management explained on the call that this was due to pharmaceutical companies being more conservative with their budgets now that the pandemic is over, resulting in digital pharmaceutical marketing growing at a rate half as fast as was anticipated this year, in the low teens. In addition, DOCS's white-glove approach to marketing has caused friction, which has led to a loss of market share. Management claims that banner ad firms have gained market share because their customers can use a self-service platform to track performance, allocate funds, and increase advertising expenditures. Management now expects revenue of $450-468 million. This implies 7% growth for the remainder of the year (2/3/4Q24 vs 2/3/4Q23), which is significantly lower than my estimate of 20% growth for FY24. As a result of these changes, my short-term outlook has turned bearish. I now believe the stock narrative will be dominated by what is going to happen in the next 3 quarters rather than the medium- to long-term outlook, hence the downgrade.
But I still have a bright view of things in the medium to long term. Management restates its $1 billion revenue goal for FY28 and plans to strengthen its client-facing self-service technologies in response to upsell weakness. I think this will be a great addition to the white glove approach that DOC is using as its main marketing strategy now. I expect that as DOCS refocuses its resources on its self-service platform, it will see an increase in the number of new SMB customers as well as improved pricing, streamlined upselling processes, and accelerated rollout times. Management believes this will lead to revenue growth of >20% after FY24, allowing the company to reach its $1 billion in revenue goal by FY28. In addition, DOCS announced that the enterprise version of DocsGPT, which now has HIPAA security, had signed three deals with leading health systems. These deals are projected to bring in a few million dollars in revenue for the company this year. In my opinion, this is a major achievement because it shows that the DOCS product is gaining traction in the market, especially among major corporations. I think there is a huge potential market for DocsGPT because of how many workflows it can improve. The following answer by management with regards to use cases is a good summary:
If you are a forward-thinking CIO or CMIO at a major health system, you probably have had doctors sending you emails saying, hey, can I use this new ChatGPT thing to help out with all of my scutwork all my paperwork? And unfortunately, the answer they've had to give them, and they've had to send out lots of emails saying, no, you cannot use this because it is not HIPAA secure. You know, the information goes back to open AI over the open web, and there's no way that you can handle medical-grade encryption with the consumer-based services out there. So, we're excited to take that and make it a HIPAA secure environment with the business associate agreement that we already have in place with over 200 health systems and really roll that out to a lot of them. 2Q23 call
Valuation
Author's work
As management has guided for a weak FY24, I have revised my model to reflect the mid-point of FY24 guidance at $460 million. My current model focuses on FY24 performance, which is different from my medium-term outlook, as I expect investors to focus on the near-term performance (as mentioned above), which is going to be weak. Hence, I assumed multiples would stay at the current level for the rest of CY23, leading to a price target for the rest of the year of $20.50.
Risk and final thoughts
I am downgrading my rating for DOCS from buy to hold due to shifting investor focus toward the near-term outlook. Despite impressive 1Q results, a weakened growth guidance for the remainder of the year prompts this downgrade.
For further details see:
Doximity: Rating Downgrade As Investors Shift Focus To The Near-Term Outlook