What a difference a day can make. Until Aug. 8, shares of Doximity (DOCS -1.10%), a healthcare-focused networking platform, were in the red for the year. However, on Aug. 9, the company's stock skyrocketed by more than 33%, making its year-to-date performance better than that of the broader market. As investors might guess, Doximity's gains had something to do with its latest quarterly report, but even after this jump, shares are down by 32% since its 2021 initial public offering.
If there is more upside ahead for Doximity, it's worth considering investing in the stock now. Is that the case? Let's find out.
Doximity's strong earnings report
First, let's review how Doximity's business works and how it makes money. The company provides a platform allowing healthcare professionals, including physicians and nurses, to look for jobs, communicate with others in their fields, catch up on the latest medical news and research, receive important confidential patient documents, and even conduct telemedicine visits.
Doximity makes most of its money from subscriptions by health systems and pharmaceutical companies that utilize its platform to advertise jobs and market new medicines to physicians.
The company's business is popular among medical workers. More than 80% of physicians in the U.S. use it, as well as the top 20 pharmaceutical companies and the top 20 hospitals and health systems. Still, Doximity's financial results haven't been great of late -- its top-line growth has been on the decline following a pandemic-related boom.
DOCS Revenue (Quarterly YoY Growth) data by YCharts
Doximity moved in the right direction during its latest reporting period, the first quarter of its fiscal 2025, ended on June 30. The company reported revenue of $126.7 million, up almost 17% year over year. Adjusted net income per share of $0.28 was up 47.3% compared to the year-ago period. Doximity beat revenue and earnings estimates during the period, which explains why its shares soared.
Further, its margins remain incredibly high. It recorded an adjusted gross margin of 91.6% during the quarter, up from 90.3% a year ago. Its adjusted net income margin of 44.1% was higher than the 37.5% reported in the prior year quarter.
Can Doximity keep up the momentum?
One reason Doximity's top-line growth has declined over the past few years is that it isn't attracting nearly as many new customers. Its net revenue retention rate, which tells us about renewals, new customer starts, and churn rate, went from 167% in the period ending June 30, 2021, to 114% in its latest reported quarter. However, some of Doximity's largest clients, including those top 20 pharmaceutical companies, are staying put.
That's a good sign for a business that offers valuable services in one of the most important industries and remains relatively stable regardless of economic conditions. Further, Doximity benefits from the network effect. The more physicians on its platform, the more attractive it becomes to its clients, and vice versa. Could there be a competing platform that takes significant market share away from the company? That's a definite maybe.
One of Doximity's problems is that websites like LinkedIn also benefit from the network effect and have a substantial network of professionals, probably including many physicians. LinkedIn arguably benefits from a stronger brand name, too, and is owned by Microsoft, an incredibly cash-rich tech company that could create a competing platform using LinkedIn as a launchpad. So, though Doximity has created a network effect, its business isn't fully insulated from the competition.
The good news is that the company still sees significant potential ahead. Doximity estimates a total addressable market (TAM) of $18.5 billion -- and it has barely scratched the surface of this opportunity. The stock could deliver strong returns as it makes headway within its TAM. Still, valuation could be an issue, too.
DOCS PE Ratio (Forward) data by YCharts
The average forward price-to-earnings ratio for the healthcare industry is 19.2 as of this writing, while the undervalued range for the price-to-sales ratio usually starts at 2 and below. Even if smaller high-growth companies are allowed to have somewhat unreasonable-looking valuation metrics, if Doximity can't keep up the solid financial results it reported most recently, the stock could fall off a cliff.
The bottom line: Doximity is worth investing in for investors comfortable with some risk and volatility. It might end up producing outsized returns.
