Removing Doximity From Watch List

Former Watch List stock Doximity (DOCS) recently reported its Q2 results.

At a glance, its results were not bad. Revenue was up 20%, and free cash flow continued to be strong, growing 31% year-over-year. The problem here was management's forward guidance.

Just 2 months ago at investor day, Doximity guided to a 2023 revenue result of $500 to $506 million dollars, or about 20% growth. After Q2, that was revised down to a range of $452-468 million - an 11% cut, implying only about 10-11% growth for the year. Additionally, the company announced a plan to cut its workforce by 100 employees (10% headcount reduction).

Those are pretty shocking revelations from what is supposed to be a growth firm. Doximity's 3-year CAGR up to now had been over 50%! What is going on here?

The explanation on the conference call was that the expectation for sales through Doximity's platform had changed. The company had previously relied on a very hands-on approach with customers, with face-to-face meetings, legal reviews, quarterly reviews, etc. Now, customers are leaning more towards a 24/7 self-service platform to monitor results and set budgets, similar to something like Google's Adsense or Facebook's Ad Manager. As a result, Doximity has decided to change strategy and deliver this as soon as possible.

Well... that's kind of concerning in several ways. First, why hasn't the company already built this? Self-service ad management is table stakes for this kind of business model. Secondly... it raises some serious concerns about the firm's excellent 2021-22 performance being (at least partially) driven by COVID-related demand. I find it a little hard to believe that demand has turned on a dime in the summer of 2023 solely due to not having a self-service platform.

The stock fell nearly 30% and frankly I think it was fully justified. Management reiterated its long-term growth targets but who trusts them anymore. This just looks like a broken story at this point. I no longer have confidence that Doximity has the growth opportunity I thought it did, and don't really trust management much anymore either. Given that, it is being dropped from the watch list today and enters the land of the "rejected". At least we never bought it!