Thread by @investing_city

I've recently taken a small position in Doximity (DOCS), violating my rule of waiting until at least the first earnings report for a recent IPO.

Here's how I'm thinking about it and the risks involved. Would love some pushback!

[THREAD] ⬇️

1/ Doximity (a combo of doctor and proximity) started as a LinkedIn for doctors but has really evolved into more of a productivity suite for medical professionals.

Connecting with other physicians is important but the company also offers HIPAA compliant e-fax, voice dialer, etc

2/ Basically, Doximity does a lot of little things that help doctors save time and improve their lives.

The 1.8 million doctors using Doximity are the cornered resource. And the company monetizes that attention through advertising.

3/ Over 80% of its revenue comes from marketing via pharma and hospitals.

For instance:

1. A pharma rep can create a sponsored video, explaining the advantages of a drug

2. A hospital can drive traffic to an outpatient center through a sponsored article

4/ A very small amount of revenue comes from the company's telehealth offering (powered by Twilio) called Dialer Pro/Enterprise.

The other chunk of sales is from "hiring solutions"

This is very similar to LinkedIn where medical recruiters can pay to message specific people.

5/ Last year, the company actually bought THMed, a high-touch healthcare recruiting firm and re-branded it to Curative.

Combined with Doximity's rich network and Curative's service, the company is a go-to resource for hiring doctors and nurses.

6/ So everything starts with serving doctors. And then these tools attract doctors and engage them. Then Doximity can pair that attention with interested parties like pharma reps and hospitals. And then that revenue can be re-invested to create more tools.

That's the flywheel.

7/ The company does have some concentration issues. Out of its 600 customers, 200 bring in $100k+ in revenue but that makes up 88% of overall sales.

Further, one customer makes up 12% of sales and 25% of accounts receivable.

8/ This doesn't worry me too much because Doximity can work with one customer but many brands.

For example, one customer has grown from using Doximity for one of its brands in 2017, and now it uses the platform for 29 of its brands.

9/ So even though one brand could churn off, that doesn't mean all of it will go at one time (though it's possible).

If I had to guess, I think this one customer is Pfizer (CEO, Jeff Tangney has a long history of Pfizer as a customer, which leads us to our next topic).

10/ Tangney started another healthcare company called Epocrates in 1998 out of his Stanford dorm room with 2 physician roommates.

They created a drug database that doctors could access from their Palm Pilots! Docs could quickly reference specific drug interactions.

11/ That company actually monetized in the early days through having buy-side investment firms pay doctors to answer survey questions.

Tangney left Epocrates in 2010 before its 2011 IPO (Athenhealth bought the company in 2013 for nearly $300 million).

12/ Where were we? Yes, Pfizer.

Well, apparently one of Epocrates' early customers was Pfizer so that's why I'm speculating that Doximity's big customer is Pfizer.

13/ Out of the company's top 200 customers, 29 of them do over $1 million in revenue.

The median growth in spend of these customers is 6x over the past 4 years.

And the latest overall net retention rate was 153%, though that's probably skewed by some large customers.

14/ DOCS' revenue grew 78% to $207 million over the TTM. $14.6 million of that was inorganic from the Curative acquisition which means organic growth was more like 65%.

Gross margins tightened just a bit from 87% to 85% because of the extra cost associated with telehealth.

15/ GAAP EBIT margins were 26% on an annual basis, up from 19% last year.

Also for the year, free cash flow margins were 38%, boosted by deferred revenue from those top customers.

16/ In short, there are very few companies out there, growing 65% with 38% FCF margins.

Add in a principled, founder-led CEO with industry tailwinds, and that's right up my alley.

17/ However, it's not all rainbows.

For one, the company grew just 36% in 2019 and 65% (organically) in 2020. As things re-open, will pharma reps and recruiters go back to targeting doctors in-person?

18/ Part of me thinks that going back to wining-and-dining docs is inherently more inefficient. Sure, the big deals will need an element of that, but I've been impressed by how strong remote software sales have been.

19/ But still, it's important to realize that Doximity was growing slower before COVID.

One other thing is that the company recognized revenue under ASC 606. If they got some huge contracts this year because of COVID, the growth could be inflated a. little bit.

20/ However, I don't think this is too big of a deal because the average contract length is about a year so it's not an $AYX situation where they were recognizing multi-year deals upfront.

The company also has saturation, with 80% of US doctors as registered members.

21/ Therefore, the main growth lever is revenue growth/customer rather than "MAU" penetration.

If net retention stays elevated, the thesis will be intact -- that pharma reps are getting high ROI from their Doximity investments.

22/ Enterprise value is about $7.6 billion. I think the company can do $500 million in free cash flow in 5 years, which at 30x, gets you to a 15% IRR.

Like I said, the main metric to watch is net retention because customers are large and "MAUs" are saturated.

End/ Thanks for reading!

Now let me know...

What did I miss? What are your thoughts?