Shares of Doximity (NYSE:DOCS) experienced a dramatic surge in premarket trading on Friday, climbing approximately 70% to $35.10, a significant jump from Thursday's closing price of $20.66. This surge, which implies an increase of nearly $2.6 billion in market capitalization, came on the heels of the company's fiscal first-quarter earnings report and updated guidance for fiscal 2027.
The company raised its full-year revenue midpoint by $6 million, now projecting between $671 million and $681 million. However, the adjusted EBITDA midpoint was lowered by $10 million to a range of $309 million to $329 million. This mixed guidance has led to a notable market reaction, with investors seemingly focusing on the potential for artificial intelligence (AI) to drive future growth, particularly through its AI Search product.
Investor Optimism Over AI Search
The premarket valuation, at $35.10 per share, was 42% higher than the average analyst target of $24.65, and approached the high-end target of $42 set by some analysts. This suggests that traders are pricing in a significant growth opportunity from AI, rather than just a single-quarter earnings beat. The company reported zero AI Search revenue in the first quarter, but management anticipates that the majority of contracted revenue will be recognized in the fiscal third quarter.
“We’re proud that our clinical AI assistant, Doximity Ask, was the top-performing U.S.-based model,” said CEO Jeff Tangney. Workflow active prescribers increased by more than 30%, while AI Search queries saw a sequential rise of over 25%. External evaluations, such as the NOHARM benchmark, placed Doximity Ask second with a score of 84.51, close to the top-scoring AMBOSS LiSA at 86.15, though the differences were not statistically significant.
Mixed Financial Results
The first quarter delivered a mixed performance. Revenue came in at $156.6 million, exceeding both the $151.7 million consensus estimate and the $145.9 million reported in the prior year, representing a 7% year-over-year increase. Adjusted earnings per share of $0.29, however, fell short of the $0.30 estimate and was down from $0.36 a year ago. Adjusted EBITDA of $74.8 million surpassed the high end of the company's guidance of $69.5 million, but was 6% lower than the prior year's $79.8 million. The adjusted EBITDA margin contracted to 47.7% from 54.7% in the same period last year, reflecting increased investment in AI computing, which also pressured non-GAAP gross margins down to 88% from 91%.
Free cash flow also declined significantly, dropping to $39.6 million from $60.1 million in the prior year, a 34% decrease. Stock-based compensation rose by 68%, contributing to the cash flow pressure.
Guidance and Valuation
The company's revised guidance implies a 0.9% increase in revenue midpoint, but a 3.0% decrease in adjusted EBITDA midpoint. The implied EBITDA margin is now 47.2%, down 1.9 percentage points from the previous guidance. Management indicated that increased investment in AI computing will persist through fiscal 2027, which is expected to continue pressuring margins.
Despite the mixed financials, the market's reaction underscores the high expectations for AI-driven growth. The surge also narrowed Doximity's valuation gap with peers. At the premarket price, Doximity's trailing price-to-earnings ratio stood at approximately 35.6, approaching Veeva Systems' (NYSE:VEEV) trailing multiple of 38.6. In contrast, Teladoc Health (NYSE:TDOC) and Health Catalyst (NASDAQ:HCAT) continue to post losses.
Analyst Sentiment and Risks
Analyst sentiment had been cautious ahead of the earnings release, with a distribution of 7 Buy, 12 Hold, and 1 Sell ratings, and an average price target of $24.65. Several analysts had recently reiterated their ratings, including Morgan Stanley's $35 target and Bank of America's $20 sell rating. The premarket surge may prompt a wave of target revisions.
The company's balance sheet remains strong, with $687.8 million in cash and securities and no debt, providing flexibility for continued investment. Doximity also repurchased $91.6 million in shares during the quarter.
However, risks remain. The premarket advance could unwind as liquidity is thinner in premarket trading. The Q2 revenue outlook is 0.8% below the Street's midpoint, and the significant decline in free cash flow, coupled with rising stock-based compensation, may concern some investors. The real test will come in Q3, when AI Search contracts are expected to convert into recognized revenue.
