Healthcare software company Doximity (DOCS -2.85%) is showing signs it’s back on the path to sustainable growth. The stock is up some 60% since its November 2022 lows, and though the latest quarterly earnings update was a mixed bag, there was plenty of good news to justify the rally.
Economic headwinds will persist in calendar year 2023, so Doximity’s management is being cautious. But it looks like a new bull market (one that might have already started, or could begin later this year, depending on whom you ask) could rocket this healthcare software stock higher in the years to come.
A financial downgrade, but a temporary one
Doximity primarily makes money through advertising on its app — sometimes described as the LinkedIn of the medical community. Nearly all physicians in the U.S. are on the Doximity app, making it an ideal place for pharmaceutical companies and other healthcare networks to place ads, hunt for talent, and the like.
But ad spending has seized up in recent quarters as global economic growth has slowed due to U.S. interest rate hikes and worry of a recession in 2023. Doximity said in the last earnings report that it estimates it garners less than 5% of U.S. medical professional marketing budgets, so ads are still a growth market for the company.
In addition to this cooling-off, Doximity also hit some snags in rolling out some new paid software products that feature video communications.
The result was a better-than-expected third quarter of fiscal 2023 (the three months ended December 2022), but a downgrade in guidance for the fiscal fourth quarter.
Third-quarter revenue grew 18% year over year to $115 million, easily topping guidance provided a few months ago. But the revenue projection for full fiscal year 2023 was downgraded to a range of $417.7 million to $418.7 million ($424 million to $432 million was the prior guidance range). This was due to some of that new video software revenue being delayed until next fiscal year (which begins this April).
The upshot here, though, is that Doximity’s leadership is conservatively forecasting 20% growth in fiscal 2024 and calling for revenue of at least $500 million.
Not just growth, but lots of profit, too
A revenue increase of 20% is not the blistering pace of expansion that early Doximity investors quickly came to expect after it went public in the summer of 2021.
But that’s OK, because flat-out growth is not the reason to own this health software stock for the next bull market. The real reason to be a Doximity shareholder is the profitable expansion the company is managing.
Free cash flow (FCF) increased 85% year over year last quarter to $47.5 million — a very healthy FCF profit margin of 41%. Net income under generally accepted accounting principles (GAAP) was down compared to the year prior, but that’s mostly because Doximity was still receiving an income-tax benefit last year (a $19.8 million benefit that added to net income).
This year, it had to pay its fair share of taxes this latest quarter. That $7.5 million provision for taxes, which subtracted from net income, resulted in a $27.3 million swing in net income due to taxable effects on the bottom line.
The main point is that Doximity is growing profitably. Not every small software company can say that. This trend is expected to continue in fiscal 2024, as management expects its adjusted EBITDA profit margin should be 43% or higher, equal to or better than the 43% expected for the current fiscal year that is almost complete.
It’s still early days for Doximity, and this is still very much a growth company. Its digital ad services are still rocking, and the company is only just beginning to expand its subscription software platform.
New ideas being tested include integration of physician schedules with Calendly (an appointment automation service), as well as a new ChatGPT-powered service that helps automate physician correspondence.
Doximity stock currently trades for 45 times trailing-12-month FCF (or 36 times enterprise value to FCF, after subtracting the $801 million in cash and short-term investments on balance from Doximity’s market cap).
It’s a premium price, but one I believe is well deserved, especially given the ramp-up in cash generation. I continue to buy small batches of Doximity stock as the company’s growth expectations begin to warm up again for the back half of calendar year 2023. Over the long term, I believe this healthcare software company’s focus on profitable growth will serve shareholders well.