The higher they climb, the harder they fall. While growth stocks are often big winners during a bull market, they tend to endure tough sell-offs during market corrections due to their overvaluation. With the major indices such as the NASDAQ experiencing a 8% pullback from record highs due to excessive call option speculation, investors are wondering the value of their holdings are really worth what they paid for.
This has been the recent experience of Veeva Systems (VEEV -0.71%), Teladoc Health (TDOC -2.91%), and CureVac (CVAC -7.97%). Veeva develops cloud-based pharmaceutical data solutions, Teladoc is becoming a leader in the telemedicine industry, and CureVac is developing a coronavirus vaccine candidate. These three healthcare companies are creating a lot of excitement in the investment world. But they are all characterized by one trait -- overvaluation. Let's look at why it's best to wait for the right price before jumping on the bandwagon of these popular stocks.
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1. Veeva Systems
Veeva Systems is quickly assuming the role of industry leader in digital data management for clinical trial investigators. In its quarter ended June 30, the company's revenue increased by 33% year over year to $354 million, while posting an impressive 41% operating margin. During the quarter, several top-20 pharma companies signed up for the companies' services for the first time.
For the full year, the company expects to generate $1.42 billion in revenue and an earnings per share (EPS) of $2.67, which is a substantial bump up from an EPS of $1.90 in fiscal year 2020. If the results seem a bit too good to be true -- they are. Using these projections, Veeva is currently trading for as much as 29 times price-to-sales and 101 times price-to-earnings.
The company's growth is fully priced in, and then some. Investors who are looking to buy shares may find it wise to be patient and wait for a better buying opportunity ahead.
2. Teladoc Health
The merger between telemedicine company Teladoc Health and diabetes management company Livongo Health (LVGO) has just about everyone in the healthcare sector talking. In the first half of 2020, 15 million new paid members joined Teladoc's platform as patients switched to virtual consultations with physicians amid the COVID-19 pandemic.
Livongo experienced a similar tailwind. During Q2 2020, the company added 80,000 new members to its namesake apps for diabetes monitoring, representing a yearly growth of 113%. The merger should create ample opportunities for revenue synergies. For example, patients with diabetes who seek an online consultation with a doctor on Teladoc can receive a referral to sign up for Livongo's app to better manage their condition.
This link is undoubtedly exciting. However, keep in mind the two companies are only expected to bring in $1.3 billion in revenue and about $120 million in adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) in 2020. Meanwhile, Teladoc and Livongo's combined market cap stands around a whopping $28.64 billion.
In other words, Teladoc is trading for approximately 22 times price-to-sales and 239 times price-to-EBITDA. Unfortunately, the premium here is too expensive for a company that expects to generate 30% to 40% in revenue for the next few years before synergies, and an additional $500 million by 2025 from the overlap between the companies' services.
3. CureVac
On August 14, Dutch biotech company CureVac made its initial trading debut after it debuted at $16 per share in its IPO. Less than three weeks later, the company's stock has soared to $55 as of Sept. 9, placing its market capitalization at more than $9.9 billion.
The cause of the trading frenzy is obvious. CureVac is currently in advanced talks with the E.U. to supply the organization with 225 million doses (enough for 122.5 million people) of its experimental messenger RNA (mRNA) coronavirus vaccine. Even if the company prices each dose at as few as 20 euros, the vaccine candidate could generate 4.5 billion euros in revenue. That's not bad for a company that just made its public market debut.
Additionally, CureVac is backed by the Bill & Melinda Gates Foundation to develop various other vaccines in its pipeline. The company also expects to receive up to 252 million euros in grant funding for its COVID-19 vaccine research from the German Ministry.
Although many entities support the company's vaccine development efforts, the problem with CureVac is its actual progress. The company's experimental coronavirus vaccine is currently in phase 1 clinical trials, with results expected in Q4 2020. Meanwhile, other healthcare giants such as Pfizer (PFE -3.85%), AstraZeneca (AZN 5.38%), and Moderna (MRNA -2.45%), are in the end states of clinical testing with their coronavirus vaccine candidates, with regulatory approval expected as soon as October.
CureVac may not actually have the ability to mass-produce its experimental coronavirus in a timely manner. Until the vaccine candidate's immune response data arrives, or the company receives confirmation of orders, I think that new investors should stay away from the stock. And if CureVac's current investors want to make a profit, they may find that now is the best time to sell.
