What happened
Teladoc Health (TDOC -1.52%) shares had fallen by 7.5% as of 12:01 p.m. Thursday due to widespread investor pessimism about growth stocks after the Federal Reserve's interest rate hike announcement Wednesday. At that point in the session, the S&P 500 was down by about 3%.
Teladoc's latest drop marks yet another setback for its shareholders, who have seen the stock fall by more than 80% in the last 12 months.
So what
Unprofitable growth stocks that were popular during the last couple of years are getting hit especially hard by the news of the Fed's 75-basis-point federal funds rate hike and the probability of further large increases over the course of the rest of the year. Those companies' interest expenses are likely to skyrocket if they need to take out new loans.
Teladoc's trailing 12-month operating expenses were above $1.6 billion, but it only has around $839 million in cash and short-term investments on its books, and its trailing 12-month free cash flow was only about $98.7 million. In short, it might need to borrow money over the next year, which it would have to do at less attractive interest rates than it was previously able to get. That would depress its future net income.
Now what
Rising interest rates make Teladoc's efforts to become profitable all the more urgent. Its shares will likely continue to fall at a slightly faster pace than the wider market as rate hikes continue. And if rates end up getting hiked even faster than what the market now anticipates, expect serious damage to the stock price.
In contrast, if management announces a major new initiative or Teladoc reports earnings that demonstrate a lower chance that it will need to take out fresh debt, that could catalyze upward movement from its shares. But don't hold your breath.
