Teladoc Health (TDOC 0.45%) is a top name in the telehealth industry. But recently, the stock has been falling sharply to levels not seen in more than a year. Investors have been rushing to hit the sell button, and many others are also likely wondering if they should follow suit.
Is Teladoc in trouble? Or is this simply a great opportunity to buy it on the dip?
Image source: Getty Images.
Why is the stock struggling so badly?
It has been a rough ride for Teladoc in the past month as its shares are down more than 20% -- and that's after falling from further highs earlier in the year. And what's puzzling is that there hasn't been any recent news that would justify such a steep sell-off. In fact, the company is coming off what I thought was a solid third quarter during which its virtual visits for the period ended Sept. 30 climbed to a record high of 3.9 million, a 37% increase from a year ago.
The reality is that growth stocks in general haven't been faring well of late, possibly due to a fear of rising interest rates, which often rattles investors. Cathie Wood's ARK Innovation ETF, which holds shares of Teladoc, has fallen by 8% in just one month. Although that's not as steep a decline as Teladoc's, it's still a noteworthy drop as exchange-traded funds are diverse and hold many stocks, and so they are less likely to fall so significantly in a short period.
But a short-term price movement isn't what matters ultimately, especially when there's no news to justify it. So instead, let's pivot and focus on Teladoc's fundamentals.
Is the business in good financial shape?
One number that may spook investors is that over the past three quarters, Teladoc has incurred a net loss of $417.8 million, more than four times the $91.2 million loss it incurred a year ago. But the company's revenue has also doubled during that time to $1.5 billion, benefiting from the inclusion of chronic-care company Livongo, which it officially acquired in October 2020.
Expenses rising at a higher rate than sales is certainly troubling. But there's still time to work on synergies as the acquisition with Livongo is in its early stages. And sometimes investors can pay too much attention to net income, which includes noncash items.
That's where the statement of cash flow can be a better indicator of financial health. And here, Teladoc looks to be in solid shape. Over the past nine months, it has generated $110.8 million from its day-to-day operations, 80% higher than this time last year. The company's cash and cash-equivalents balance has grown from $733 million at the start of the year to more than $823 million as of the end of the third quarter.
For a growth company, cash is key, and that can help Teladoc pursue more opportunities down the road.
There is plenty of growth still on the horizon
The company recently held its investor day and offered some promising projections. Teladoc expects its top line to reach $2.6 billion next fiscal year (vs. an annual rate of about $2.1 billion currently). And by fiscal 2024, it expects revenue to top more than $4 billion. From now until then, the company projects sales to grow at a compound annual rate of 25% to 30%.
As for the total addressable market, Teladoc believes it could be as much as $160 billion, pointing out that one-quarter of working-age adults don't have a primary-care provider. That's a void the company is looking to help fill. Teladoc's recently launched Primary360 service offers personalized, ongoing care and can be a key part of that growth. Teladoc believes that 80% of the population can use at least one of its many services, whether it's dermatology, nutrition, mental health, chronic conditions, or general medical care.
Is the stock too cheap to pass up?
Teladoc's recent decline doesn't worry me as an investor; if anything, it's an enticing opportunity to buy more at a reduced price. The stock is trading near a 52-week low, and you have to go back to the start of 2020 -- before the pandemic-induced surge in telehealth's popularity -- to see when it was trading this low. Several analysts believe the stock could soar to $160 or more, which would be a return of some 50% from where it is today.
Although it may be nerve-racking to a buy a falling stock like Teladoc, it could be one of the best buys out there right now.
