Description

Company background: Doximity is a platform service offering “LinkedIn for Doctors” and telehealth tools to physicians. 80% of US physicians are on this doctors-only network, as are 90% of med school students. There is a version targeting nurses as well with 50% of all nurses onboard. Using this captive audience it sells marketing services to pharmaceutical companies as well as hospital systems. It also acquired a hospital staffing company before IPO that now leverages this channel. It is growing revenues in the mid-20s organically with low-30s operating margins. 

Thesis in 3 bullets:

·         Excellent monopoly business with pricing power at a fair valuation after a resetting of expectations

·         Bulletproof financial profile with no leverage and 12% of market cap in cash

·         Several capital deployment upside opportunities not visible today and therefore not in valuation

The opportunity & why it exists: Earlier this year, Pop4Pres put out an excellent short report outlining how the windfalls of COVID have accelerated DOCS’s business in a way that the market was underestimating. Given the short (~1-year) contract cycle DOCS runs on, management lacked the level of visibility needed to guide around this as well. With success early in the year, the company raised guidance twice on big beats that partially relied on repeating upsell success. In its most recent release, management was forced to bring guidance back down, lowering the upsell assumption in revenue. Shares crashed and the stock now sits at ~$33 (roughly where Pop4Pres valued the business via DCF) vs an ATH of >$100. The narrative has quickly shifted to pessimism, both on the macro and the TAM of the company.

I believe this has created an opportunity to own a well-capitalized monopoly (within its niche) with large end market growth and pricing power at a fair price in exchange for several upside call options. If multiple compression from ~45x NTM P/E continues to offset growth, I’d expect DOCS to become an obvious takeout candidate for either a clinical CRO like IQV/CLR, or VEEV given the many obvious synergies between businesses.

Macro: While it is true that many large pharma companies are optimizing for EPS right now, digital is clearly going to remain part of the marketing toolkit for the customers Doximity has managed to bring on board to date. One customer, as highlighted in its 4Q call, even adopted a digital-first approach centered on Doximity’s offering. The digitization of pharma marketing is a secular trend, both in enabling reps and replacing them, and DOCS is front-and-center here.

TAM (M3 analog): Many have suggested that TAM saturation may be taking place and that the market for DOCS’s services is much smaller than the numbers thrown out by management. My main disagreement with this notion comes from an important analog – there is a Japanese company that has a similar business model (a gamified news website that uses a point system to keep users engaged on the platform w/ a pharma ad business), more revenue, and sustained DD growth in a much smaller geography.

At the end of its FY2022 (March), M3 did $1.5B in revenue, growing 23% y/y and 29% the year prior. About half of this revenue was from pharma marketing and staffing solutions. M3 also has clinical trial solutions, an adjacency that I expect DOCS to move into someday but do not bake into my valuation. I will revisit this as it is a major source of capital deployment opportunity or a reason for DOCS to be a takeout candidate.

Below are some US/Japan pharma market comparisons according to NationMaster:

These numbers imply nearly a 4x SAM for a business that is doing 1.5x in revenue vs DOCS today. Japan is arguably less competitive as a market, meaning the US could be bigger (and the $7-$8B thrown out by management seems to back that claim). Back-of-the envelope math shows DOCS is only ~20% of the way to replicating:

The unbaked upsides: With a path to sustainable mid 20s+ growth on market opportunity alone, I see DOCS as fairly valued on conservative estimates (my DCF supports ~$35-45 depending on what your discount rate is these days). To me, this makes DOCS extremely attractive to own because the market has yet to focus on the upsides given the weird comp environment we are in coming out of COVID and into a tough macro for pharma customers.  

Margin potential: M3’s Medical segment has an operating profit margin of 45%, and doesn’t add back SBC the way DOCS does for its EBITDA number. DOCS run-rates that addback at around 10% of sales, meaning the comparable EBITDA margin is somewhere around 32% if you use DOCS’ guidance. This is an investment year for DOCS, but it’s easy to see how you get to M3’s levels or higher with operating leverage and pricing power alone, and DOCS should have lower customer acquisition costs since it uses a social network and sells a low-cost product instead of effective paying doctors to use its platform (M3 gives you a gift card for participating on their site consistently). The street has a history of outsourcing margin work to DOCS management if you look at what DOCS said about margins at IPO and compare to the 10% higher levels they say are possible today.

Capital deployment potential: M3 also has 2 other segments that utilize its captive audience of physicians in Japan that Doximity does not today. These are clinical trial solutions, where M3 helps with evidence solutions and clinical trial enrollment. These are huge markets in the US, and being a better enrollment solution has been a major source of share gains for clinical CROs that have gotten it right. DOCS has the assets it place to win this space if it chose to start buying clinical CROs, which aren’t particularly expensive assets. It could do a simple roll-up financed in a variety of ways.

Takeout potential: Considering the fact that Jeff was willing to sell Epocrates in the past, I wouldn’t be surprised if this was in the back of his mind. If DOCS doesn’t do the above, it’s because the likely outcome is to sell to a company that wants the assets to do it in reverse. The likely buyers could afford to pay up for DOCS and it would margin-accretive to almost any buyer.  

Note that these potentials are all hard to quantify, but accelerating growth puts a lot of upward pressure on multiples.  

Risks:

·         US Pharma marketing’s digital shift could stall if rep layoffs caused too many political issues

·         User engagement has been a hot-button topic for investors, since DOCS hasn’t been great at giving traditional user metrics expected of digital ad businesses. Similarweb seems to suggest web+app visits are growing and JEF put out a report a month ago that also suggests that DOCS’s platform is becoming stickier from an engagement perspective.

Conclusion

Now that DOCS’ growth estimates have normalized, and sentiment is near an all-time-low for the company, I think the business is worth owning at this price because downside seems limited, especially if there is a world where margins keep expanding and growth accelerates like I think they could in FY24. The upside potential is massive for DOCS given the strategic value of a captive doctor audience and its utilize in both developing and commercializing pharmaceuticals.  

Thanks for reading - welcoming any feedback or risks you all might think I’m missing from here since I’m considering making this an even larger holding of mine than it already is (I’m comfortable with concentration when downsides are low enough).

Catalyst

Earnings, M&A, Buybacks