This Is the Biggest Problem With Doximity's Stock

Doximity (DOCS 2.31%) operates a networking platform for doctors that claims to have 80% of U.S. physicians on it. It’s an impressive statistic, but that hasn’t been enough of a reason for investors continue buying up the stock this year. While other growth stocks have been thriving due to artificial intelligence (AI), there’s not the same level of excitement around Doximity — even though the company has launched its own chatbot, DocsGPT.

But Doximity’s problems aren’t due to AI. The biggest issue with the stock is simply its valuation. Let’s take a look at the numbers.

Doximity is trading at a huge premium

Today, investors are paying a multiple of more than 40 times earnings to own a piece of Doximity’s business. And that’s a reduced valuation as shares of the company are down more than 30% this year. However, this has never been a cheap stock to own since it went public in 2021.

DOCS PE Ratio data by YCharts

If you’re paying a massive multiple for a company, you should have a lot of confidence that the business will be able to generate strong growth or that it has a significant competitive advantage that’s worth paying a premium price.

But for a company that often gets referred to as the “LinkedIn for Doctors,” there doesn’t appear to be a huge moat there for Doximity to exploit. Tech giant Microsoft, after all, already owns LinkedIn and it could easily create a rival network if it wanted to do so.

With Doximity generating around $435 million in revenue over the trailing 12 months, there’s not a big case to be made that the opportunities are lucrative enough for the tech giant or any other company involved with social media to take on Doximity, and so I’m wary of the company’s growth potential. 

The company’s guidance is extremely underwhelming

Doximity also isn’t generating the type of growth that investors might expect from a company that’s trading at such a high multiple. In its most recent earnings report, for the period ended June 30, Doximity’s revenue totaled $108.5 million and was up 20% year over year. But for the current quarter, it’s projecting that revenue will only be as high as $109.5 million. 

A slowing growth rate is nothing new for Doximity; this has been a persistent trend for the company. Now, with sales potentially remaining flat, it’s not going to be any easier for the company to attract growth-oriented investors.

DOCS Revenue (Quarterly YoY Growth) Chart

DOCS Revenue (Quarterly YoY Growth) data by YCharts

Doximity isn’t a stock I would buy

Doximity does have the potential to be a good investment in the long run, especially if it can continue to attract many healthcare professionals. But it’s not a stock I would buy. If it gets to be too successful, that might attract big tech companies to come in with competing platforms.

Meanwhile, the sharp decline in the growth rate despite having 80% of physicians on its platform also is a cause for concern, suggesting that perhaps having a huge network of doctors isn’t a surefire recipe for sustainable growth. Throw in the stock’s high valuation, and this is an investment that starts to look risky.

Investors may be better off not buying the stock and instead simply keeping an eye on the company’s performance to see if it can find a growth catalyst. If it can’t, it’ll be hard to justify investing in this business.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Doximity and Microsoft. The Motley Fool has a disclosure policy.

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