Make no mistake: These three healthcare stocks are high-risk, high-reward propositions for long-term investors. However, the ideas supporting these businesses' operations feel like "no-brainers" for creating wealth. For Teladoc Health (TDOC -3.10%), Olaplex (OLPX), and Figs (FIGS -1.48%), it will be a matter of turning their revolutionary offerings into outperforming investments for the long haul.
Let's explore how this could become the case and why these sub-$25 stocks offer appealing risk-reward ratios for buy-and-hold investors looking decades ahead.
1. Teladoc Health
Providing whole-person healthcare to over 83 million members in a virtual setting, Teladoc Health is perfectly positioned to benefit from the megatrend of democratizing healthcare for the masses through modern technology.
However, while Teladoc's long-term vision seems like a no-brainer, almost everything that could go wrong has gone wrong for the company's stock over the last two years. Spurred by its horrifically timed $18.5 billion acquisition of Livongo in late 2020, the company has seen its share price drop by more than 91% from its all-time highs.
With the vast majority of the premium from this acquisition (goodwill) now removed from Teladoc's books, the company looks to refocus. Specifically, the company's (much more reasonably priced) $17 million acquisition of BetterHelp in 2015 looks poised to lead Teladoc back to success. Accounting for 43% of the company's total sales, BetterHelp grew revenue by 29% year over year during the fourth quarter and generated more than half of Teladoc's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Concisely explaining the burgeoning segment's upside, CEO Jason Gorevic explained, "Our BetterHelp offering provided over 1 million individuals with access to mental healthcare over the past year, many of whom are unlikely to have received any care at all, if not for our services."
Now trading with a price-to-sales (P/S) ratio of just 1.7 and generating positive cash from operations, Teladoc's improving risk-reward outlay may be worth a smaller, more speculative investment for buy-and-hold investors.
2. Olaplex
While prestige haircare specialist Olaplex may not be a traditional healthcare stock, its 160 global patents highlight its science-based focus on improving and rejuvenating its customers' hair. However, dropping nearly 87% from all-time highs, investors have fled as the company's sales and earnings per share (EPS) declined 22% and 50% year over year, respectively, in its most recent quarter. Worse yet, management guided for a further 15% decrease in 2023 compared to the prior year.
So what exactly makes Olaplex a no-brainer investment from a risk-reward perspective?
First, the company ranked first or second in the 15 most essential brand qualities compared to its 11 most prominent premium haircare peers. The beauty of this immense brand power is the premium pricing Olaplex's products command, which allowed for a net income margin of 26% in Q4 -- despite the company's slowdown.
Second -- and thanks to these high margins -- Olaplex plans to increase its marketing spend by 75% in 2023, focusing on its strong digital and social media presence. As the No. 1 hair care brand on Meta Platform's social media outlet Instagram, the company's popularity among younger generations on a global scale leaves it well-positioned to capitalize on this increased marketing spend.
Furthermore, Olaplex now trades at a slim forward price-to-earnings (P/E) ratio of only 14 following its precipitous drop. While it will be difficult to restart sales growth, the company's brand power and incredible profitability make it worth a smaller investment at today's deep discount.
3. Figs
Founder-led, direct-to-consumer (DTC) healthcare apparel company Figs is determined to bring comfort and style to a forgotten clothing niche: scrubs. Through its myriad of color drops, its layering system with underscrubs, and a burgeoning nonscrubs portion of sales, Figs grew its active member base by 23% year over year to 2.3 million in the fourth quarter of 2022.
However, since its initial public offering, the company has faced decelerating growth rates and saw its free cash flow (FCF) turn negative, causing its share price to plunge 88% from its all-time highs.
Despite this disappointing performance, Figs managed 13% year-over-year sales growth in Q4 and could be poised to restart its growth rate after entering markets in 10 new countries in 2022. Across its international segment in its most recent quarter, Figs saw a tremendous 76% year-over-year revenue growth, leaving the category to account for 11% of total company sales already.
Following its stock price drop over the past year, Figs stock now trades at 2.2 times sales. However, should the company return to the 12% net income margins it averaged before its IPO, as its international operations mature, Figs would effectively be trading with a reasonable price-to-earnings of 19.
While this global expansion is temporarily weighing on margins today, its upside potential makes Figs an attractive risk-reward proposition for investors willing to hold five years or more.
