Doximity, Inc. (NYSE:DOCS) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

The Doximity, Inc. (NYSE:DOCS) share price has fared very poorly over the last month, falling by a substantial 26%. Longer-term shareholders would now have taken a real hit with the stock declining 4.5% in the last year.

Although its price has dipped substantially, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may still consider Doximity as a stock to avoid entirely with its 37x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Doximity as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Doximity

Keen to find out how analysts think Doximity's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Doximity's Growth Trending?

In order to justify its P/E ratio, Doximity would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 44%. The strong recent performance means it was also able to grow EPS by 82% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 1.2% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

With this information, we find it concerning that Doximity is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Doximity's P/E?

A significant share price dive has done very little to deflate Doximity's very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Doximity currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Doximity with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.