"Never try to catch a falling knife." You've probably heard the old investing adage. The premise is that it's not a good idea to buy a stock when it's still in a major downtrend.
In many cases, the statement makes sense. However, I don't think it's always applicable. Sometimes, investing in beaten-down stocks before they begin to rebound is a smart strategy if the underlying business is strong. Here's such a growth stock down 80% to buy now and hold for years to come.
A business built for the 21st century
Teladoc Health (TDOC 0.32%) truly has a business that's built for the 21st century. The company was a pioneer in providing telehealth services to patients. Teladoc began operations two decades ago with the idea "that everyone should have access to the best healthcare, anywhere in the world on their terms."
The company has made significant headway in making that idea a reality. Today, Teladoc ranks as the global leader in virtual care. It serves more than 76 million members. Its corporate client base totals more than 12,000, including over half of the Fortune 500.
Teladoc expanded its focus along the way to address more than minor ailments. The company now offers a wide range of virtual care services that include primary care, chronic condition management, dermatology, mental health, and more.
And Teladoc's business is booming. Its revenue soared 86% in 2021 to $2.03 billion. Although Teladoc isn't profitable yet, its bottom line continues to improve. The company also generated positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of nearly $268 million last year, more than doubling the level from 2020.
Behind the plunge
So why have Teladoc's shares plunged 80% since early last year? I think there are three main reasons.
First, investors worried that Teladoc's growth would slow significantly after COVID-19 lockdowns were lifted. It's true that the company's U.S. paid membership growth has tapered off. However, Teladoc's number of visits continues to increase robustly.
Second, some are concerned about increased competition. Amazon jumped into the telehealth market last summer. Doximity has picked up momentum with its telehealth service. Zoom hopes to expand its telehealth business as well.
But the increased competition doesn't seem to have impacted Teladoc so far. The company is even partnering with Amazon to bring Teladoc's telehealth services to Alexa users.
The third reason for Teladoc's dismal stock performance is the transition away from growth stocks that began in late 2021. Lots of former high-flying stocks have plummeted as a result of this shift.
To be sure, Teladoc's decline began much earlier. However, investors' move away from growth stocks has made it hard for the virtual care leader's shares to mount a major comeback.
Why buy and hold Teladoc?
Despite the meltdown over the past 16 months, Teladoc is a great stock to buy now and hold. Actually, one key argument in the stock's favor is that it's now a bargain because of the steep sell-off.
Teladoc's market cap currently stands below $10 billion. The company's total addressable market tops $260 billion -- in the U.S. alone. Teladoc estimates that it has a $75 billion revenue opportunity within its existing member base.
The company fully expects to generate revenue exceeding $4 billion by 2024. Teladoc's shares trade at only 2.4 times that amount. With the kind of growth prospects that Teladoc has, that's a cheap valuation.
But can Teladoc really continue to deliver strong growth over the long term? I think it can.
Virtual care appears to be still only in its early stages of growth. Eighty-two percent of consumers say that telehealth is equal to or better than in-person care. Payers love virtual care because it's cost-effective.
Teladoc reigns as the clear leader in the market. The company's scope of virtual care services is unparalleled in the industry. J.D. Power ranks Teladoc No. 1 in telehealth customer satisfaction.
This stock might still be a falling knife for now. However, the consensus opinion among Wall Street analysts is that Teladoc will soar more than 70% over the next 12 months. I think that kind of return is quite possible. And my view is that Teladoc could easily deliver a 5x or greater gain over the next decade.