Many investors looking at individual growth stocks have had a tough year, but a volatile market has provided a handful of opportunities to get stock in great companies at a discount. A good strategy is to sift through beaten-down stocks and capitalize on market overreactions.
That said, you have to be careful that you aren't buying into a value trap for a doomed company that will continue to bleed value. Let's take a closer look at three of this year's worst performers on the New York Stock Exchange and see if we can determine which camp they fall into.
UBER Total Return Level data by YCharts
1. Teladoc Health
Teladoc Health (TDOC 2.86%) entered 2021 as a popular healthcare stock that rode the remote-work wave through the global pandemic. Unfortunately, that momentum has disappeared, and the stock price is down more than 52% year to date. The fervor around work-from-home and telehealth stocks was understandable, but now it's clear that the valuations got too rich. Even though Teladoc's results have been fantastic, the growth wasn't enough to satisfy the market's overly optimistic demands.
Teladoc hit an all-time high in February 2021, and things fell apart from there, starting with the company's fiscal 2020 fourth-quarter earnings report later that month. Teladoc's revenue doubled for the full year 2020, and visits rose 150% to more than 10 million. However, the stock price dropped sharply after the company provided full-year 2021 forecasts that were below analyst estimates. Competition and reduced impacts from the pandemic put a cap on the rate of expansion. Even though the company expected to double its revenue in 2021, this wasn't good enough for investors to justify the stock's valuation.
Image source: Getty Images.
This was the theme that played out all year. Teladoc's revenue growth has been roughly equal to expectations -- the company even slightly increased its full-year forecast. However, this pace confirms investor concerns that its growth rate is slowing down too quickly. Membership growth hasn't been enough to satisfy Wall Street analysts, there are concerns that the company is relying too heavily on acquisitions for expansion, and the company's losses have been a bit higher than anticipated. The stock price dropped steeply after Teladoc's fiscal 2021 Q1 earnings call, and disappointing forecasts on an analyst day later in the year caused another dip.
An unprofitable company with a 30% sales growth rate isn't going to justify a price-to-sales ratio of 25.
TDOC PS Ratio data by YCharts
Teladoc now trades at a more reasonable price-to-sales ratio below 8. That's way less risk for investors who want to take the plunge. Still, the slowing growth rate and rising competition cast doubt on the company's economic moat and long-term prospects. Teladoc is a major player in a promising growth industry, but shareholder returns won't be reliable unless something changes.
2. Pinterest
Pinterest (PINS 1.78%) echoes Teladoc's story, in many ways. After reaching an all-time high earlier this year, it's down about 41% year to date. The social media stock excited investors with tremendous user growth during the pandemic, spurred on by the DIY boom while everyone was stuck at home. The market is re-evaluating a bit now, and it's becoming clear that Pinterest was never going to live up to unfair expectations.
The company's revenue is up around 75% through the first 3 quarters of 2021. However, that rate of expansion slowed to 45% year over year in Q3, which is a red flag for growth-stock investors. Pinterest is also struggling to achieve monthly active user (MAU) growth, which is an absolutely essential metric for social media businesses. MAU count in the U.S. has been declining for the company, most likely due to the normalizing economy; people are abandoning all the DIY projects that they took up last year.
Rising average revenue per user (ARPU) is driving revenue, which is a strong development. However, the stock's prior price-to-sales ratio above 30 probably requires improvements in both ARPU and MAU. Mixed results tend to weigh heavily on growth stocks with expensive valuations, and Pinterest has been no exception.
There are things to like about Pinterest, despite these struggles. The company is free-cash-flow positive, and its forward PE ratio is now below 36. There are early signs that the MAU losses are slowing, so the effects of a return to normal life could be mostly digested by Pinterest already. There are clear avenues for continued growth, such as rising international ARPU. If you think Pinterest has some staying power, it now appears to be trading at a reasonable valuation for purchase.
3. Uber
Stock in Uber Technologies (UBER 1.85%) has been volatile, and it's down about 26.4% year to date.
The stock price dropped sharply after missing Q1 sales forecasts by a wide margin. This shortfall was caused by the reclassification of Uber's drivers in the U.K. into employees rather than contractors. Overall bookings were up 24%, so the company's operations are still expanding. Still, the company's mobility segment, which includes its flagship ride-hailing business, was down 1% from the prior year after adjusting for the U.K. situation.
Uber remained volatile throughout the year. The company did a great job to build its food-delivery business, which showed explosive growth through the pandemic. This was one of the few obvious bright spots for investors. Uber shares were dealt serious blows as the company grappled with regulatory issues in places such as Belgium and California. The market is worried that these challenges will intensify from here, and that could drastically change Uber's cost structure.
Amid that uncertainty, Uber is still free-cash-flow negative. Food delivery growth will be difficult to replicate as restaurant attendance recovers. The level of competition is also likely to intensify for Uber from here.
The 2021 swoon dropped Uber's enterprise-value-to-EBITDA to a reasonable 30.6. If you love the company, this is a reasonable entry point, but there's still a ton of uncertainty hanging around the stock.
