It may be hard to see past the gloomy cloud around Teladoc Health's (TDOC +0.88%) first-quarter earnings report, which it delivered after the bell Wednesday. There was bad news aplenty. A massive impairment charge widened the telehealth company's loss. Headwinds hurt the growth of two key businesses. And management cut its full-year guidance.
As a result, the shares plunged 40% in Thursday's trading session, taking the stock's decline to more than 60% year to date.
After hearing all this, you may not want to touch Teladoc shares with a 10-foot pole. But things might not be as bad as they seem. There's actually reason to believe that these factors may not damage the company's long-term prospects.
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First, the bad news
In the quarter, Teladoc recorded a non-cash $6.6 billion goodwill impairment charge. When a company makes an acquisition, the part of the purchase price that goes beyond the measurable value of the actual assets is defined as "goodwill." It's the idea of paying for the potential earnings that the purchase eventually will deliver. Teladoc bought Livongo back in 2020 for $18.5 billion. This week's impairment charge indicates that the purchase price was too high.
The second and third bits of bad news have to do with the BetterHelp direct-to-consumer mental health offering and Teladoc's chronic care business. The company's yield on its BetterHelp marketing spend has been lower than expected in recent weeks. Teladoc says smaller rivals are bidding high to win advertising placement linked to online search terms. The company also says some rivals are prescribing controlled substances to patients -- something Teladoc won't do. (The Drug Enforcement Administration has been temporarily allowing telehealth doctors to deliver these prescriptions during the COVID-19 crisis. Usually, in-person visits are required.)
As for chronic care, it's taking Teladoc longer than planned to sell its services to potential clients. Employers remain more focused on the coronavirus situation and on their efforts to bring employees back to offices than on finalizing telehealth contracts. And to make matters worse, Teladoc's smaller rivals are flooding employers' desks with their offers.
These troubles prompted Teladoc to cut its annual guidance. The company now expects revenue in the range of $2.4 billion to $2.5 billion in 2022. That's down from an earlier forecast of $2.5 billion to $2.6 billion. It also revised its adjusted EBITDA guidance down to the $240 million to $265 million range from its previous range of $330 million to $355 million. Management now expects Teladoc's net loss per share to widen drastically to as much as $43.50 from the prior range of $1.60 to $1.40. It's important to note, however, that this includes that non-cash goodwill impairment charge, which by itself amounts to a loss of $41.11 per share.
NYSE: TDOC
Key Data Points
There is a bright side
One big point that some investors have ignored when it comes to Teladoc is that all those headwinds may cause difficulties this year -- but they won't necessarily damage the business in the long run.
I wouldn't expect another huge impairment charge, for example. And the Livongo acquisition still isn't completely integrated into Teladoc's operation. That means we're likely to see it drive some growth down the road.
The problems with BetterHelp are due to outside factors that won't last forever. As Teladoc CEO Jason Gorevic said during the earnings call, rivals won't be able to rely on prescribing controlled substances and bidding high for better search placement to give them edges over the long term. Meanwhile, Teladoc still predicts BetterHelp will "grow in the upper half of our long-term target range for mental health revenue growth of 30% to 40% per year."
The slowdown in sales for its chronic care business doesn't signal a drop in interest. Instead, it just means contracts are taking longer to come in -- and that could delay some revenue. Even in this situation, Teladoc expects chronic care revenue to climb by a percentage in the low- to mid-teens this year.
What does all of this mean for investors?
Clearly, Teladoc's stock price may take quite a while to recover. At least some of the issues that upset so many investors could persist in the coming quarters. These problems do seem temporary. But it will be important to monitor Teladoc's progress to be sure the company still can meet its long-term targets. There are signs its "whole person" focus will enable the company to stay ahead of rivals. In the quarter, for example, multiproduct sales represented 78% of total sales.
Teladoc's stock has crashed to a level many would consider cheap. It now trades at about 2.5 times sales. But has the stock reached bottom? That's impossible to predict.
Considering the market sentiment around Teladoc, cautious investors would be best advised to watch this stock from the sidelines. But if you're more of an aggressive investor with a long time horizon for your portfolio, you might want to take this opportunity to bet on Teladoc's growth and its eventual stock price recovery.
