Arguably no stock has gone from hero to zero more dramatically than telehealth company Teladoc Health (TDOC -2.91%). The company's growth surged during COVID-19, but its blockbuster acquisition of Livongo has seemingly blown up in its face.
To be frank, Teladoc messed up. However, there's evidence that the worst could be over. Teladoc could still prove a lucrative long-term investment after its staggering 91% slide from highs. Here is why investors should reconsider this star-crossed healthcare company.
Losses may have peaked
A picture can say a thousand words. For example, consider Teladoc's massive losses over the past year, summed up by a simple chart below. The company's market cap is $4.6 billion, so it's pretty mindblowing that it could lose so much money, right? How is it not bankrupt at this point? But context is critical, so I'll color in the lines below.
TDOC Revenue (TTM) data by YCharts
The vast majority of the losses you see above are non-cash expenses. In other words, they're accounting losses and not actual cash leaving the company's pockets. A big chunk of this is write-downs; Teladoc bought Livongo for $18.5 billion in cash and stock in 2020. However, Teladoc's growth has stalled since the pandemic, and management concluded that it had grossly overpaid when buying Livongo.
A company can declare that an asset on its balance sheet has declined in value and can write down the difference as a loss. Teladoc has written $9.6 billion off the value of Livongo over the first half of this year. It's not great seeing a company admit it wasted that money, but it is what it is.
Significant acquisitions often involve stock-based compensation for executives, and Teladoc is no exception. You can see below that compensation has been high since the merger in 2020:
TDOC Stock Based Compensation (TTM) data by YCharts
But just like the write-downs, stock-based compensation is a non-cash expense. It's accounted for on the books, but it's not taking any cash out of Teladoc. Compensation peaked above $600 million in 2021, but it's coming down. As long as write-downs don't continue, investors could reasonably conclude that significant losses could be in the rearview mirror.
Not in financial trouble
It's important to distinguish the difference between accounting losses and cash losses. Both are important, but cash losses can make a business insolvent and put it down for good. Fortunately, Teladoc's cash profits, measured as free cash flow, have turned positive despite the multi-billion-dollar losses you see in headlines.
TDOC Free Cash Flow data by YCharts
Positive cash flow means cash goes onto the balance sheet barring dividends or share repurchases. The company now has $883 million in cash, though it also carries $1.5 billion in debt. Interest expenses come from cash flow, which means Teladoc can service its debt and still generate cash profits.
Is a comeback story on the table?
Most companies won't lose more than 90% of their value without serious problems, and I think the stock deserved some pain after Teladoc's mishaps. The company took a massive swing by buying Livongo and whiffed. The write-downs will probably keep Wall Street down on the stock until it shows notable improvement in its operating results.
Teladoc has been a painful stock to own over the past two years, but now that the smoke is clearing, patient investors face a possible comeback story. The company is generating positive free cash flow, and revenue growth remains positive -- even if it has slowed dramatically. Investors should consider the stock a speculative investment, but there is enough potential to consider owning shares.
