What goes up often comes down. That's been the case for Teladoc Health (TDOC -2.91%) in 2018.
By late September, shares of the virtual healthcare services provider had soared nearly 150% year to date. However, Teladoc has since given up around two-thirds of those gains.
Is Teladoc a falling knife to avoid? Or is the telehealth stock a great buy now at a more attractive price?
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Behind the plunge
Let's first dig into why Teladoc Health stock dropped so much over the last couple of months. There were three factors that contributed to the steep decline.
First, the broader market fell in October. There's an old saying that a rising tide lifts all boats, but the opposite is true as well. Teladoc stock fell along with most other stocks.
More importantly, though, technology stocks took a drubbing. When the large, well-known tech stocks drop, the smaller ones typically get sucked down in the vortex, too. That's especially the case for smaller stocks that are unprofitable yet still have relatively large market caps. Like Teladoc.
But investors had other worries that weren't related to the broader market. Teladoc Health CFO and COO Mark Hirschhorn sold more than $700,000 of his stock right after the company's third-quarter earnings update. A short-seller posted an online article predicting that sales for one of Teladoc's fastest-growing businesses would soon fall. These two stories hit on the same day. As you might imagine, Teladoc stock tanked in response.
There was more to these stories, though. Hirschhorn did sell off a large block of shares the day after Teladoc's Q3 update. However, this sale had been scheduled over four months earlier. He also had a pre-set purchase of a smaller yet significant number of shares on the day before the Q3 update.
The short-seller's online article stated that sales for Teladoc's BetterHelp mental health business would fall because of a controversy about YouTube stars receiving referral payments for promoting the BetterHelp website. BetterHelp is an important driver of Teladoc's growth, although the business makes up less than 15% of the company's total revenue.
It's important to note, though, that these kinds of referral payments are a common practice. Also, YouTube channels generate less than 5% of BetterHelp's new subscribers.
Beyond the plunge
The reasons for Teladoc's steep decline underscore the ongoing challenges for the stock. Teladoc's premium valuation makes it subject to hard drops anytime there's a hint of bad news for the broader market or the company itself. However, there has been a lot more good news for Teladoc than bad news over the last couple of years.
Teladoc Health enjoys a killer advantage with its head start in telehealth. Around 40% of the largest companies in the world contract with Teladoc to provide virtual healthcare services to their employees. Over 35 of the biggest health plans in the U.S. have partnered with Teladoc. More than 290 hospitals and health systems have teamed up with the telehealth leader.
There are competitors in the telehealth space, of course. But none of them offer the scope of services that Teladoc does. None of them have the global presence that Teladoc has, either. Thanks to its acquisition of Advance Medical, Teladoc now claims operations in more than 125 countries.
The future appears to be bright for virtual healthcare services. Patients like using the services because of the convenience. Payers like virtual healthcare because it lowers their costs. As overall healthcare costs increase with more older individuals across the world, telehealth should experience even more growth as a way to control costs without angering patients.
To buy or not to buy?
Teladoc Health probably isn't a great stock to buy for investors who are averse to volatility. This is going to be a highly volatile stock for a long time to come.
It's not a great stock for value-oriented investors, either. The company probably won't be profitable anytime soon. Its market cap of $3.7 billion isn't justified by sales generated thus far.
But for growth investors, Teladoc looks like a great pick. Telehealth is still in its early stages with a tremendous opportunity for growth. Teladoc Health is the top player in the space with a lead that will be difficult to overcome. The stock might experience sharp declines now and then, but there should be more ups than downs for Teladoc over the long run.
