2023-03-17 06:26:29 ET
Summary
- Doximity Inc is a rapidly growing company in one of the largest sectors out there, despite that the buy case is not quite there as the premium is too high.
- Expected to grow around 16.5%, the Healthcare IT market is a very enticing market to get exposure to.
- Valuations are important and reducing your risk is vital, therefore I think the buy case for Doximity Inc right now is non-existent.
Investment Thesis
The investment thesis for Doximity Inc. ( DOCS ) is that it is a rapidly growing healthcare technology company with a unique business model and strong revenue growth potential. The company operates in a large and growing market, and its platform has become an essential tool for many healthcare professionals. While Doximity is trading at a premium valuation compared to its peers, its high revenue growth potential and unique business model may make it an attractive investment opportunity for some investors. In my case, I believe strongly in realistic valuations and never overpay for something. So, for Doximity, I feel the price is too high to ever make a buy case right now. Instead, I would sell shares because the likelihood of them falling and correcting is quite high.
Market Tailwinds
Doximity operates in the healthcare technology market, specifically in the area of digital communication and collaboration tools for healthcare professionals. The company provides a platform for doctors, nurses, and other medical professionals to communicate with each other, share patient information, and coordinate care.
The healthcare technology market has been growing rapidly in recent years, driven by several tailwinds. One of the most significant is the increasing adoption of electronic health records (EHRs), which has created a need for secure and efficient communication tools that can integrate with these systems. In addition, the rise of telemedicine and remote patient monitoring has created a need for digital tools that can support these new models of care.
Another important tailwind is the increasing focus on value-based care, which incentivizes healthcare providers to work together more closely to improve patient outcomes and reduce costs. Collaboration tools like Doximity can help facilitate this kind of teamwork and coordination.
Overall, the healthcare technology market is expected to continue growing at a rapid pace in the coming years. According to a report by Grand View Research , the market size was valued at $41.7 billion in 2020 and is expected to grow at a compound annual growth rate ((CAGR)) of 16.8% from 2023 to 2030. Factors driving this growth include the increasing adoption of EHRs, the rise of telemedicine and remote patient monitoring, and the growing focus on value-based care.
For the fiscal fourth quarter ending March 31, 2023, the company expects to generate revenue between $109.6 million and $110.6 million, which would represent a significant increase from the same quarter in the previous year. Adjusted EBITDA is expected to be between $45.2 million and $46.2 million, which would also represent a significant increase from the same quarter in the previous year.
For the full fiscal year ending March 31, 2023, the company has adjusted its guidance to revenue between $417.7 million and $418.7 million and adjusted EBITDA between $180.2 million and $181.2 million. These revised estimates suggest continued strong growth for the company and represent an increase from its previous guidance.
Furthermore, Doximity is providing preliminary guidance for its fiscal year ending March 31, 2024, with revenue expected to be greater than $500 million and an adjusted EBITDA margin of 43% or greater. These projections indicate that the company is confident in its ability to continue growing its revenue and profitability in the future.
The Financials
Doximity has released its financial report for the quarter ending December 31, 2022. The report reveals that the company's assets have increased by $75,730 million, from $991,357 million on March 31, 2022, to $1,067,087 million on December 31, 2022. Notably, the increase is primarily due to an increase in the company's cash and cash equivalents and also an increase in its deferred contract costs.
Despite the increase in assets, investors should be aware of the significant decrease in the company's accumulated other comprehensive loss from $(15,294) million on March 31, 2022, to $(18,742) million on December 31, 2022. This loss is a cause for concern as it suggests a potential lack of efficiency in the company's operations.
Furthermore, investors should also take note of the increase in the company's liabilities, which rose from $112,763 million on March 31, 2022, to $136,913 million on December 31, 2022. This increase was due to an increase in deferred revenue, non-current, and operating lease liabilities, non-current.
Although the company's assets have increased, the increase in liabilities and the loss in accumulated other comprehensive loss should be considered when making an investment decision.
Doximity has shown impressive growth in its operating cash flow and free cash flow. The company reported an operating cash flow of $48.7 million, up by a significant 78% from the previous year's $27.3 million. Similarly, free cash flow also rose by an impressive 85% year-over-year, from $25.6 million to $47.5 million. These numbers indicate that the company's cash-generating ability has improved significantly, which could be a positive signal for investors.
Risks
One key risk is the company's reliance on a limited number of customers for a significant portion of its revenue. Doximity generates a significant portion of its revenue from subscriptions to its communication and collaboration tools from a relatively small number of healthcare organizations, which could leave the company vulnerable to fluctuations in demand or customer churn. Any loss of a major customer could have a significant impact on the company's financial performance.
Another risk is the potential for increased competition in the healthcare technology market. Doximity operates in a highly competitive and rapidly evolving industry, with new players entering the market and established companies expanding their offerings. If Doximity is unable to differentiate its platform or keep up with changing customer needs, it could struggle to maintain its market share.
Additionally, Doximity may face regulatory risks, particularly around issues of data privacy and security. The company deals with sensitive patient information, which makes it subject to stringent regulatory requirements. Any data breaches or other security issues could result in legal and financial penalties, as well as damage to the company's reputation.
Finally, broader market headwinds could also pose risks to Doximity's business. The ongoing COVID-19 pandemic, for example, has disrupted healthcare systems and could impact the adoption of digital tools like Doximity. Economic downturns or changes in healthcare policies could also impact demand for the company's products and services.
In summary, while Doximity operates in a growing market with significant tailwinds, it also faces several risks related to its balance sheet, competition, regulatory requirements, and broader market conditions.
Valuation and Conclusion
When compared to peers in the healthcare technology industry, Doximity appears to be trading at a premium valuation based on common valuation metrics.
Doximity currently has a P/S ratio of around 13.46, which is significantly higher than the industry average of 3.99. This suggests that investors are willing to pay a premium for the company's revenue growth potential. But that number is way too high for any company to have to pay. Until more realistic levels are reached, the company remains very overvalued in my opinion.
Based on these valuation metrics, Doximity appears to be trading at a premium relative to its peers in the healthcare technology industry such as AmerisourceBergen (ABC) and McKesson Corporation (MCK), both of which have a P/E around 12-13. However, it is important to note that the company is growing rapidly and has a unique business model that differentiates it from competitors. Additionally, the healthcare technology industry is expected to continue growing at a rapid pace in the coming years, which could provide tailwinds for Doximity's growth.
In conclusion, the investment stance on Doximity is subjective and depends on individual investment goals and risk tolerance. While the company appears to be trading at a premium valuation compared to peers, its high revenue growth potential and unique business model may make it an attractive investment opportunity for some investors. With all that said, I think the price right now is too high to justify the company as a buy. Instead, it either has to grow into the valuation or a drop in share price will need to occur. Until then, I would stay away and rate it a sell instead.
For further details see:
Doximity: Too High Of A Premium