There are many ways to determine whether a stock is cheap, but one way of doing so is determining whether there is substantial upside potential for the company. And while the market often bids up shares of companies with excellent prospects, it is possible to find solid stocks still trading at reasonable levels based on their growth potential.
Let's look at two growth stocks with plenty of fuel: Vertex Pharmaceuticals (VRTX -0.06%) and Teladoc Health (TDOC -2.40%).
1. Vertex Pharmaceuticals
Biotech giant Vertex Pharmaceuticals has had an impressive stock market performance over the past year. That's partly due to the company's consistently strong financial results, which it owes to its monopoly in the cystic fibrosis (CF) drug market. In the first quarter, Vertex revenue jumped by 13% year over year to $2.37 billion.
But beyond solid top-line growth, recent developments signal that the company could continue substantially outperforming the market over the next five years and perhaps beyond. First, it is now even more unlikely that it will encounter competition in its core CF specialization anytime soon since one of the companies that were closest to developing alternative products, namely AbbVie, recently threw in the towel.
Second, Vertex completed regulatory submissions to health agencies in the U.S. and Europe for what will almost certainly be its next blockbuster, exa-cel. This gene-editing therapy that it developed alongside CRISPR Therapeutics targets two rare blood-related disorders. Based on the initial patient population of 32,000 they plan to treat, and given that gene-editing treatments tend to cost well above $1 million, this market could be worth tens of billions. And that's before considering the fact that Vertex and CRISPR could develop ways to target substantially more patients with exa-cel.
And third, Vertex is also making steady progress with other pipeline candidates, including VX-548, which targets acute and neuropathic pain and is currently undergoing a phase 3 study. The company's goal is to add five new products to its arsenal in the next five years.
The biotech's CF franchise should continue performing well. All these developments strongly suggest that despite its beating the market in the past year (and the past five and ten years, for that matter), Vertex Pharmaceuticals still has substantial upside potential. That's why investors can safely add the company's shares to their portfolios today.
2. Teladoc Health
Teladoc has lost a substantial portion of its value since mid-2021. Like many other so-called pandemic stocks, the telemedicine specialist saw its business slow down as the outbreak started receding.
But the great thing about Teladoc is that the industry in which it operates isn't just some pandemic trend destined to fade into obscurity. Telemedicine is here to stay, and some analysts predict a bright future for this market.
For instance, the company Grand View Research projects the global telehealth industry will register a compound annual growth rate of 24% through 2030. One of the strengths of telemedicine is its convenience. Getting some medical care from your couch (basic consultations and prescriptions) beats traveling several miles to see a doctor.
Teladoc is a leader here, and despite what its stock price suggests, the company has made tremendous progress over the past three years in many important metrics, be it revenue, gross profit, gross margin, virtual-care visits, paying members, and the like. Teladoc's mental health service, BetterHelp, is progressing well, as is its chronic care unit.
TDOC revenue (quarterly) data by YCharts.
The bottom line has been one of the company's struggles, but even there, things are improving compared to 2022. Last year, Teladoc reported massive net losses due to noncash impairment charges related to an acquisition. Those net losses are now in the rearview mirror.
Given the company's high gross margins, Teladoc should be able to turn in a profit once its most significant expenses, which include marketing and advertising, decline. That should happen once it becomes a more-established corporation. In the meantime, the stock's sell-off has gone too far, with its share price well below its early 2020 levels.
Teladoc's forward price-to-sales of 1.5 (where anything under 2 is generally considered good) signals that it is trading at reasonable levels, too. Given its excellent prospects in telemedicine, investors shouldn't wait too long before buying the company's shares.
