Can Doximity Improve Your Portfolio's Health?

Social media networks are a dime a dozen nowadays, and we are starting to see them segment into particular specialities.

While Facebook is the largest network for basic person-to-person and business-to-consumer connections, newer social networks tend to focus on a particular niche. For example, Instagram was founded on sharing photos, TikTok and YouTube on short-form video, Pinterest on ideas, and LinkedIn on professional connections.

The social media model has proven to be lucrative for investors. Facebook (now known as Meta) and YouTube (owned by Google/Alphabet (GOOG)) both have contributed to strong stock performances from their parent companies. Pinterest (PINS), while its stock hasn't performed great since IPO, is still a $16 billion company. LinkedIn was sold to Microsoft (MSFT) in 2016 for $26 billion.

Today, I want to take a look at a Green Screen stock representing a social media network with an even tighter focus: the medical community. But this is even more than just a social network. The company is Doximity (DOCS). Does it have what it takes to make the "Green Dot" stock list? Let's take a look.

A Social Network for Doctors

Doximity has been characterized as "LinkedIn for doctors", and that's not a bad way to think of it.

The customer side of the network are profiles created by medical professionals, including physicians, nurse practitioners, and specialists in the medical field. These folks use Doximity to connect and consult with other professionals, read medical news, learn about new trends and procedures in the field, and so forth.

The revenue side of the network are pharmaceutical companies, device makers, healthcare supply companies, and organized health systems. These firms generate revenue in several ways. One is paying Doximity to market and communicate to this large base of medical professionals. Think of how you may follow your favorite brand or sports teams on Facebook, or see tailored ads while scrolling through your feed. The concept is the same here, just specialized to healthcare.

The company is also building out a number of additional service features to its platform. The company has launched a telehealth platform, an electronic prescription channel, and digital workflow tools (fax, signature, chat), all of which can be licensed by health care systems for their doctors to use.

Also, like LinkedIn, Doximity offers a hiring solution for clients to post jobs and message candidates with (tailored, of course, to health care professionals).

Overall, the platform offers a lot of value to the medical industry. It's a professional social network, a recruiting and hiring platform, a digital workflow tools provider, and a news and information source.

Revenue Model

As mentioned, nearly all of Doximity's revenue comes from pharmaceutical and other medical industry suppliers paying it to advertise and provide services to the 2 million professionals on the network. Advertisers are charged a subscription model priced based on the number and composition of targeted Doximity members. Services like telehealth and digital workflow tools are also purchased on a subscription basis by the health care plans that employ the physicians that will use them.

Sales growth has been extremely strong, with a 3-year compound annual growth rate of 53%. Like a lot of ad-based firms, though, this has slowed down in 2023, with the most recent quarter showing just a 19% in sales, as advertisers pull back budgets in anticipation of recession.

What is the long-term potential here? The company estimates a total addressable market (TAM) of $19 billion - $7.5 billion from pharmaceutical marketing, $7 billion from health system recruiting and staffing, and $4.3 billion in telehealth. With a current revenue run rate of $500 million, that would leave Doximity less than 3% penetrated - a lot of open field for continued growth. When you consider that its largest advertisers - the pharmaceutical companies - spend only 5% of their marketing dollars with Doximity, the potential for continued growth is enticing.

There is also potential to expand laterally, adding specialists like dentists, psychologists, and physical therapists to the network.

Doximity has traditionally reported incredibly strong revenue retention rates over 150%, although this fell to 117% in the most recent quarter (still good, but not as impressive). This is a testament of the ongoing value it is providing to its paying customers.

Overall, the revenue model looks good. A subscription-based ad network is clearly a recurring revenue model, although marketing spend always ebbs and flows with general economic conditions. Subscription SaaS tools likewise are recurring sales. And there is plenty of room for the company to grow at 20% rates for the foreseeable future.

Is There A Moat?

There is a strong case for Doximity having a NETWORK EFFECT economic moat.

On the consumer side, the platform boasts over 2 million medical professionals, including 80% of U.S. physicians, 50% of nurse practitioners, and 90% of graduating U.S. medical students.

That creates a very valuable, focused network for the nearly 300 pharmaceuticals, hospital systems, medical device makers, and other customers to market and sell to.

There is really nothing else like Doximity at present, and it is highly unlikely there will be any direct competitor coming to market any time soon. There is just no business case for it - Doximity already has the idea locked up. There is no compelling reason to create a competitor, and it would be very hard to pry away those 2 million users for what, at least initially, is going to be an inferior network.

That said, there are many competitors on a feature-by-feature basis. Doctors can use LinkedIn, Facebook, Google, and others for networking and/or reading medical news. There are numerous telehealth providers including Teladoc and Amwell. Healthcare staffing can be accomplished with alternative job boards and dedicated recruiting firms. Zoom, Slack, and Microsoft provide similar chat and video conferencing tools.

It is the consolidation of these offerings into a single platform, tailored to medical professionals and suppliers, that is Doximity's core value proposition. And in that respect, I think it has a very strong economic moat, indeed.

Leadership and Financial Strength

No less than 3 co-founders remain in leadership positions at Doximity.

Jeff Tangney is one of them and remains as CEO. A long-time entrepreneur in the healthcare space, he previously co-founded Epocrates, a mobile medical reference app that launched on Palm devices in the '90s and eventually became one of the very first iPhone apps. It was sold to Athenahealth for almost $300 million in 2013.

Shari Buck is another co-founder, currently a senior vice president for marketing, formerly holding the head of product title. Also remaining is Nate Gross, a doctor who serves as Doximity's chief strategy officer.

Together these 3 have been with the firm since its inception in 2010, growing it from nothing into the premier network for medical professionals, and building out a compelling array of tools to help its clients accomplish their goals. Insider ownership remains strong, with 45% of the firm's economic ownership (and 87% of its voting power) held by its executive leadership. Tangney alone owns 33% of the company. This aligns management with our interest as long-term investors.

Doximity is a well run and efficient company. Gross profit margins are impressive at nearly 88%. The firm is highly GAAP profitable (30% operating margins), free cash flow positive (an impressive 41% FCF margin), and debt-free with $840 million in cash and investments on the balance sheet. Free cash return on invested capital is over 100%, a remarkable figure. There's nothing NOT to like here!

Risks

I would rank Doximity as a "medium" risk stock.

The main risk is slowing growth. After growth rates of 78% and 66% in 2021 and 22, respectively, growth moderated sharply to 22% in fiscal '23 (ending March 31st), and in the most recent quarter it dipped below 20%. Clearly the '21 and '22 numbers were driven by COVID, but we are still going to need high teen's to low-20's growth for 5+ years to justify the fair value estimate. If Doximity's growth continues to flag, the company could prove to be overvalued at present.

We will want to monitor the net revenue retention rate, as well. It has fluctuated quite a bit over the years, with most recent figures sitting at 117%. That is still quite good, but with nearly all major suppliers already onboard with Doximity, expanding with existing customers is key to growth. Net retention is an extremely important figure here.

As always, we will want to keep a close eye on acquisitions. A number of competitors, notably Teladoc, torpedoed their businesses by trying to expand too much, too soon, and wildly overpaid for acquisitions in the process. Doximity has a few on their belt (notably THMED in 2020 and Amion in 2022), although both were small and seemingly reasonably valued. A move to expand into an all-encompassing digital platform by making a huge acquisition would be a major concern.

Conclusion

Doximity is an attractive company, with reasonably good growth potential, a strong network moat, an excellent financial model, and founder-led leadership. It checks all the boxes we're looking for in a "green dot" stock. It gets added to the Watch List today, and we will keep an eye on it for a good time to buy in.