Is Teladoc a bad news buy?
Teladoc Healthit is (TDOC -17.67%) the misfortunes are not over. Shares of the telemedicine giant have fallen 23% since announcing a massive goodwill impairment charge in April.
Now shares are falling again after the company announced a second goodwill impairment charge. The company recorded this charge in the second quarter. Shares slid nearly 18% in one trading session on July 28, following the July 27 earnings report.
At the same time, revenue and doctor visit growth slowed at Teladoc. The company also faces other challenges.
Despite all the bad news, the latest earnings report offered us some signs that the future could be bright for Teladoc. Does this make the company a bad buy? Let’s find out.
Not just a pandemic actor
I’ve been generally positive about Teladoc over time. The pandemic has offered the company a big boost to revenue — but it’s not pandemic-only stock. Teladoc’s revenues were already on the rise before the health crisis, and telemedicine is a growing market. It is expected to reach over $396 billion in 2027, according to Fortune Business Insights.
Teladoc is a leading player. Membership in the United States totals over 56 million.
But the company has faced headwinds lately. A big issue was the $6.6 billion non-cash goodwill impairment charge recorded in the first quarter, which indicates that Teladoc overpaid when it acquired Livongo in 2020. To make matters worse, Teladoc recorded a new goodwill impairment charge of $3 billion in the second quarter. This is linked to the decline in the Teladoc share price.
As for income and visits, they are still progressing, but not as much as in the past. Revenue grew 18% year over year in the second quarter. That compares to 25% growth in the first quarter and triple-digit growth just a year ago. The total number of visits increased by 31% in the second quarter. This has slowed from the 40% gain in the same period a year ago.
According to Teladoc, the current economic environment means that potential customers are taking longer to decide and finalize contracts, which is delaying revenue. Declining consumer morale is also weighing on Teladoc’s BetterHelp mental health services. Finally, a stronger dollar translates into lower revenue from international customers.
Can these problems be solved? In the long term, yes, because they are linked to the economic situation, not to the flaws in Teladoc’s activity. Once the economy improves, these headwinds should disappear.
But that doesn’t mean we should ignore the current situation. Teladoc still has to go through these difficult times. And we don’t know exactly how long they will last.
Let’s look at some of the positive signs from the Teladoc report. One is chronic care. This is an area with a lot of potential due to the number of Americans with chronic illnesses.
Nearly half of Americans suffer from at least one chronic disease. And people who enroll in chronic care tend to opt for more than one program. About 30% of chronic care members are enrolled in multiple programs, Teladoc says.
Another sign of future growth is Teladoc’s primary care service, which is still in the early stages of growth. Data shows that people who don’t typically go to the doctor use Teladoc’s Primary360. Two-thirds of members using the service had not seen a doctor in the previous two years.
Finally, Teladoc continues to increase two key metrics that should increase revenue over time. These are US paying members and revenue per member. They gained 8.8% and 13%, respectively, year over year.
Is the stock a buy?
Considering all these points, is Teladoc a buy today? For cautious investors, no. Even if the future looks bright, the road ahead will certainly be strewn with pitfalls.
Teladoc is not yet profitable and the economic situation could continue to hurt the business, making profitability more difficult to achieve. As a result, investors could sanction the stock for a while longer.
Still, more aggressive investors should take a second look at this telehealth juggernaut. The stock is trading at less than three times sales. If Teladoc handles this crisis well and continues to grow – albeit at a slow pace – that price seems pretty cheap.
An investment in Teladoc shares is unlikely to pay off right away. But Teladoc still offers investors the possibility of great long-term rewards.
Adria Cimino has no position in the stocks mentioned. The Motley Fool fills positions and recommends Teladoc Health. The Motley Fool has a disclosure policy.