Doximity (DOCS)

Healthcare professional network Doximity (NYSE:DOCS) announced better-than-expected revenue in Q1 CY2025, with sales up 17.1% year on year to $138.3 million. On the other hand, next quarter’s revenue guidance of $139.5 million was less impressive, coming in 2.4% below analysts’ estimates. Its non-GAAP profit of $0.38 per share was 39.3% above analysts’ consensus estimates.

Company Overview

Founded in 2010 and named for a combination of “docs” and “proximity”, Doximity (NYSE: DOCS) is the leading social network for U.S. medical professionals.

The coronavirus pandemic has underscored the importance of high-quality health infrastructure in times of crisis. Coupled with intense competition between drugmakers and the growing volume of data in the health care sector, demand for data management solutions in the healthcare space is expected to remain strong in the years ahead.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Doximity grew its sales at a 18.4% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Doximity.

This quarter, Doximity reported year-on-year revenue growth of 17.1%, and its $138.3 million of revenue exceeded Wall Street’s estimates by 3.5%. Company management is currently guiding for a 10.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11% over the next 12 months, a deceleration versus the last three years. Still, this projection is above the sector average and implies the market is baking in some success for its newer products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Doximity’s billings punched in at $183.6 million in Q1, and over the last four quarters, its growth was impressive as it averaged 23.5% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Doximity is extremely efficient at acquiring new customers, and its CAC payback period checked in at 5.9 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Doximity’s gross margin is one of the best in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 90.2% gross margin over the last year. That means Doximity only paid its providers $9.80 for every $100 in revenue.

This quarter, Doximity’s gross profit margin was 89.5%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Doximity has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 39.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Doximity’s operating margin rose by 5.5 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Doximity generated an operating profit margin of 35.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Doximity has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 46.8% over the last year.

Doximity’s free cash flow clocked in at $96.98 million in Q1, equivalent to a 70.1% margin. This result was good as its margin was 17.3 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Doximity’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 46.8% for the last 12 months will decrease to 44%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Doximity is a profitable, well-capitalized company with $915.7 million of cash and $12.4 million of debt on its balance sheet. This $903.3 million net cash position is 8.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Doximity blew past analysts’ revenue and EBITDA expectations this quarter. On the other hand, its revenue guidance for next year fell short of Wall Street's estimates and suggests a significant slowdown in demand. Overall, this was a weaker quarter. The stock traded down 18.2% to $47.80 immediately after reporting.

Updated: May 16, 2025 at 10:29 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Doximity.

Doximity is a fine business. Although its revenue growth was a little slower over the last three years and analysts expect growth to slow over the next 12 months, its bountiful generation of free cash flow empowers it to invest in growth initiatives. And while its forecasted free cash flow margin suggests the company will ramp up its investments next year, its admirable gross margin indicates excellent unit economics.

Doximity’s price-to-sales ratio based on the next 12 months is 17x. When scanning the software space, Doximity trades at a fair valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $67.88 on the company (compared to the current share price of $51.51), implying they see 31.8% upside in buying Doximity in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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