2022 wasn’t a fun year to be an owner of growth stocks. With inflation and interest rates rising, valuations of high-flying enterprises were slashed, especially those that suffered a slowdown in performance. And that’s certainly been the case for Teladoc Health (NYSE:TDOC).
The remote healthcare conferencing company gained a lot of investor attention during the pandemic. But since then, love for this enterprise has all but evaporated. After a massive acquisition of Livongo Health made it the largest telehealth platform in the world, the stock price has been in what appears to be a doom spiral. What happened? And is it finally time to start buying shares in this business?
Overpaying like a chump
Strategically, the acquisition of Livongo Health made perfect sense. As previously stated, the deal transformed the company into a global leader in digital healthcare. And it also granted the group some much-needed exposure to patients in need of chronic care.
That would certainly explain why platform utilisation today is actually higher than during the pandemic. And this progress is also starting to be reflected in the underlying profitability metrics of this enterprise. The problem was the price tag.
Teladoc forked out $18.5bn to secure this deal, almost all of which was goodwill. As a quick reminder, goodwill is the premium a company pays during an acquisition. The timing was pretty awful since only a few months later, the stock market correction would commence. And with quarter on quarter of writing off its goodwill, Teladoc’s losses skyrocketed, due to these impairment charges.
To put this in perspective, the entire market capitalisation of Teladoc today is only $2.5bn. And it’s a perfect example of how large acquisitions in the pursuit of growth can create chaos if they fail to live up to expectations.
Where are we now?
Since this fiasco, the situation at Teladoc has improved. The group’s operating income is close to entering the black with free cash flow reaching $200m in 2023. That’s certainly helped return strength to the balance sheet and provides management with more financial flexibility.
In the meantime, sales are still rising. Last year, the group’s revenue reached $2.6bn, a new record high. Yet while these financials are heading in the right direction, the growth stock isn’t. And the culprit appears to lie with lacklustre growth forecasts.
Guidance from management indicates the firm’s targeting a revenue of up to $2.74bn as the best-case scenario. That’s a total of 5.4% growth compared to the 2023 figures. As for losses, they’re expected to shrink, but only as low as $0.80 per share versus $1.34 last year. In other words, the company’s slowly moving in the right direction, but the low level of growth isn’t enticing investors to stay on the ship.
The bottom line
Teladoc shares are now trading at levels not seen since 2016. And personally, I think this is a bit of an overreaction from investors, considering the business is significantly larger and controls far more of the market.
However, I’m sceptical that a share price rally will occur until management finds a way to re-ignite the growth engine. And in the meantime, there are other growth stocks that look far more promising, for my portfolio.
The post Down 90%, is this growth stock finally worth buying in April? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Zaven Boyrazian has positions in Teladoc Health. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
