Cut your losses -- You've heard the advice; I've heard it. And it makes sense. A stock that falls 50% must double just to regain its lost ground. That's not easy to do.
Many investors are cutting their losses with Teladoc Health (TDOC 0.30%) right now. Shares of the virtual-care leader plunged 47% on Thursday morning after Teladoc reported its first-quarter results on Wednesday following the market close. And this big drop came on the heels of the healthcare stock's decline of nearly 40% year to date before the first-quarter results were announced.
But for every disenchanted investor selling Teladoc stock, there's an equally motivated investor scooping up the shares. Is Teladoc actually a no-brainer buy after the first-quarter meltdown?
Parsing the bad news
There were two reasons behind Teladoc's massive sell-off following its first-quarter update. First, the company posted a jaw-dropping net loss of $6.67 billion, or $41.58 per share. Second, Teladoc lowered its full-year 2022 outlook. It now expects revenue in the range of $2.4 billion to $2.5 billion, compared to the previous forecast of between $2.55 billion and $2.65 billion.
The company also reduced its guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to between $240 million to $265 million from the previous range of $330 million to $355 million.
How did Teladoc lose so much money? The company recorded a goodwill impairment of $6.6 billion. Goodwill is the difference between the purchase price for an acquisition and its book value. Teladoc's paid $18.5 billion for Livongo Health in 2020 but had to add a huge amount of goodwill to its balance sheet because Livongo's book value wasn't nearly that high.
Companies must regularly reevaluate the goodwill they carry on their books, though. In Teladoc's first-quarter conference call, chief financial officer Mala Murthy listed several factors that caused the huge write-down. At the top of the list was Teladoc's sustained decline in share price. The lower prices of other digital healthcare stocks also played a role in the goodwill impairment, as did an increased discount rate fueled by the Federal Reserve's interest rate hikes.
CEO Jason Gorevic attributed the lower 2022 guidance to two underlying reasons. He said that the company is obtaining lower-than-expected returns on direct-to-consumer (DTC) mental health advertising. Gorevic also said that Teladoc is seeing "an elongated sales cycle" in the chronic-condition markets.
Roughly 75% of the revenue-guidance cut was due to lower growth in Teladoc's BetterHelp mental health business. Around two-thirds of the adjusted EBITDA reduction was due to higher advertising costs for BetterHelp.
Image source: Getty Images.
Just how bad is the bad news?
Make no mistake: Teladoc's $6.6 billion goodwill impairment gives the company a black eye. It's clear now that it badly overpaid for its acquisition of Livongo. However, there is one silver lining: The worst is probably now over.
Teladoc recorded $14.5 billion in goodwill at the end of 2021. With the latest write-off, that total should fall to around $8 billion. Sure, it's possible that additional impairments could be necessary in the future. But I doubt we'll see another one nearly as large as what Teladoc delivered in the first quarter.
What about Teladoc's 2022 guidance cut? The factors behind the reduced outlook could also be less worrisome than they might appear at first glance.
Gorevic specifically mentioned that smaller private competitors are causing search-engine advertising costs to increase. These newer companies are bidding highly for certain search keywords. Gorevic said that the rivals are making "economically irrational decisions" that aren't sustainable over the long term.
Some of these rivals are also gaining customers by selling controlled substances via telehealth -- something Teladoc doesn't do. However, the suspension of regulations that allow this will almost certainly only be temporary.
COVID-19 distractions continue to be one reason for longer sales cycles for the chronic-disease market. Gorevic also said that Teladoc is "seeing clients inundated with a number of new smaller point solutions, which has created noise in the marketplace."
But those COVID distractions should diminish. Also, Teladoc is still working on integrating Livongo's chronic-care software into its whole-person care platform. When that integration is complete, it should give the company a significant competitive advantage. And the knowledge that this integration is on the way could help push potential clients to select Teladoc now instead of going with a rival app.
Overlooked good news
There's also plenty of good news in Teladoc's first-quarter update that many investors could be overlooking. Most importantly, the company still expects revenue to jump by roughly 20% or more in 2022 even after its guidance cut. And adjusting for the huge goodwill impairment, Teladoc's bottom line continues to improve.
The company has a strong late-stage pipeline. Sure, it's taking longer than expected to close some of the deals. However, that doesn't mean that Teladoc won't close many or most of them.
It is also only in the early days of its launch of the Primary360 virtual primary-care product. Look for the company to announce some big wins with Primary360 later this year.
A no-brainer decision?
Take a step back for a minute. Forget all of the buzz about Teladoc's first-quarter update. Instead, let's look at the company from a larger perspective.
Teladoc continues to deliver solid revenue growth in the ballpark of 20% or more. It still has an enormous addressable market of over $260 billion in the U.S. alone. The company remains the clear leader in virtual care. And its shares trade at less than 2x the low end of its expected sales.
If you weren't reading about the huge goodwill impairment and the lower 2022 outlook, would buying the stock be a no-brainer decision? I suspect for many investors it would be.
