When stocks are down, it can be tempting for investors to go along with the rest of the market and sell shares of otherwise great companies. But for long-term-minded investors, that is precisely the wrong thing to do. Even amid a sell-off, sticking to corporations whose investment theses remain intact will pay off down the road.
Let's look at one growth stock that has significantly lagged the market lately but remains an excellent pick for investors focused on the long game: Teladoc Health (TDOC 4.58%). As of this writing, the company's shares are down by nearly 71% over the past year, but analysts remain positive, giving the stock an average price target of $141, according to Yahoo! Finance.
Given Teladoc's current share price of $75, that means the street thinks it has the potential to nearly double from its current levels. Let's see what may be the reasons for optimsim.
Why Teladoc stock is down
While growth stocks have been hammered recently due to marketwide issues, Teladoc's shares have been southbound for longer than just a few months. Several issues contributed to the company's poor performance over the past year.
First, Teladoc was highly successful amid the pandemic's peak in 2020. With healthcare facilities saturated by COVID-19 patients -- not to mention government-imposed lockdown orders that limited people's mobility -- many turned to telemedicine to access some essential services such as consultations with physicians, prescriptions, and referrals. Teladoc was one of the big winners of this shift.
However, the healthcare startup's stock rose too far too fast, and so did its valuation. Last year, investors sold off Teladoc's shares in response -- which helped bring its valuation metrics back to Earth.
Second, the company remains consistently unprofitable. During the third quarter, the company's net loss came in at $84.3 million, which was much worse than the net loss of $35.9 million reported during the year-ago period. The market has been punishing growth stocks that aren't profitable for a while now.
Even though Teladoc's revenue rose by 81% to $521.7 million during the quarter, the persistent red ink on the bottom line no doubt played a role in sending its stock price lower in the past 12 months.
Here's why I still have faith in Teladoc
Despite recent headwinds, there remains a strong bull case for Teladoc. The first reason it could stage a strong comeback -- and deliver market-beating returns in the long run -- is that the telemedicine industry is here to stay. This wasn't just some pandemic trend as telehealth provides excellent perks to both physicians and patients.
Sitting on the couch and having a consultation with a physician is significantly more convenient than driving several miles for the same service. It also results in time and cost savings. On the flip side, physicians can fit more consultations into their schedules.
According to some estimates, the telemedicine market will expand at a compound annual rate of 25.9% through 2030. Meanwhile, Teladoc benefits from a first-mover advantage in this space. While that isn't everything, it has its perks. Teladoc's first-to-market position has arguably helped it build some name recognition, which isn't trivial.
But in my view, the company's most important competitive edge lies in the network effect, which refers to when the value of a service increases as more people use it. Teladoc has over 50,000 clinicians and offers more than 450 sub-specialties in its network.
Customers -- including individuals, third-party payers, and companies looking to offer telemedicine as part of their employees' health plans -- will tend to gravitate toward those platforms with the broadest network of professionals, which will, in turn, attract even more physicians onto the platform.
This dynamic helps ensure that the company will retain the bulk of its customers while adding new ones even as competition in the market intensifies. Teladoc's clients already include more than half of Fortune 500 companies.
It's also worth noting that Teladoc's mounting losses are in part due to the company's choice to reinvest heavily into the business to help fuel future growth. Teladoc sees a total addressable market of $261 billion in the U.S. alone. Thanks to its growing competitive edge, Teladoc is ideally positioned to capture some fraction of this market, maintain its revenue growth rate, and eventually record consistent profits.
At current levels, the stock is about as cheap as it has been in more than a year. Teladoc might not nearly double in the next 12 months as Wall Street thinks it could, but this healthcare stock remains a great long-term pick even amid challenging market conditions.