Virtual medicine company Teladoc Health (NYSE:TDOC) was one of the biggest winners of the COVID-19 pandemic. By offering people remote access to healthcare providers, Teladoc carved out a niche for itself in the new era of medical care. Since then, however, the stock has sold off drastically and inflicted serious losses on investors who bought in 2020 and 2021.
Last week, Teladoc released its earnings report for the second quarter. Wall Street’s outlook on the news was generally pessimistic, but there are still some kernels of good news for the company to be found.
Here are four reasons to give Teledoc Health a second look and consider it as a buy while the price remains low.
Teladoc Could Be Oversold
The first and most compelling argument for buying Teladoc Health is that the stock could be oversold.
To date, Teladoc Health has lost nearly 60 percent of its value this year. Some of this loss is fully justified, as the stock was almost certainly overvalued at the heights reached during the pandemic. Following this drastic plunge, though, there are some indications that Teladoc has sold off too far and may now be undervalued.
The first key metric that indicates the stock could be trading too low is its price-to-sales ratio. As of the end of July, this ratio sat at 2.72.
Even prior to the COVID-19 pandemic, Teladoc’s price-to-sales averaged 5-10. Given that the stock is trading at its lowest price since 2017, the current pricing seems to largely ignore the vast gains in the popularity of virtual medicine that occurred during the COVID-19 pandemic.
While somewhat lower sales growth rates are likely once the pandemic subsides, it’s quite probable that the selloff has gone too far and could eventually reverse.
Speaking of sales, analysts also expect a fairly robust rate of sales growth to continue for at least this fiscal year. Growth rates are currently projected at about 18.71 percent, much higher than the industry average of just 5.94 percent.
Teladoc’s price-to-book ratio is also very low at just 0.65. This suggests that the company is now trading well below the total value of its assets.
While there are instances that a price-to-book of less than one is justified, it seems strange in the case of a company like Teladoc that is still delivering double-digit revenue growth.
Ongoing losses and shrinking free cash flows likely explain some of the disparity, but it’s also very possible that investors have simply sold the stock off to below its intrinsic value in the midst of a rout for high-growth companies.
A final supporting piece of evidence for this view is the high margin reported by Teladoc. In Q2, gross margin on a GAAP basis reached 68.2 percent, up from 67.9 the year before. Such high margins should support earnings as revenues grow, eventually leading to a recovery in share prices.
Teladoc’s Membership Is Still Growing
As a company that is still in its early stages, sustained growth is key to Teladoc’s future. Fortunately, the company is still reporting reasonably strong membership growth that should support higher future revenues.
In Q2, Teladoc’s membership grew by 9 percent year-over-year. Existing members are also making more regular use of the service, as visits were up 28 percent year-over-year.
Critically, higher numbers of visits have also translated to higher revenues per customer. In Q2, Teladoc generated $2.60 in revenue per paid member. While a relatively small number, this was up from $2.31 in the same quarter in 2021. As Teledoc broadens its services and visits continue to rise, this number will likely continue to improve.
These facts couple with the growing telemedicine market to create a bright outlook for Teladoc. From 2022 to 2030, telemedicine as an industry is expected to grow at a compounded annual rate of 19.5 percent. Assuming Teladoc continues to ride this market wave, the company should be able to sustain a fairly high rate of growth for multiple years.
The Company’s Cash Reserve Is Expanding
One of the most overlooked aspects of the recently reported Q2 results was an improvement in Teladoc’s cash position.
In the six months ending on June 30th, Teladoc raised its reserve of cash and cash equivalents to $881.16 million. This was up from $783.72 million a year earlier.
This improvement in the company’s cash reserve could help it weather higher interest rates and invest in further growth. Although revenue and earnings are still far more important, this metric is a small sign that Teladoc is on the right track when it comes to managing its balance sheet.
Teladoc Expects Higher Revenues in Q3
A final reason to take a second look at Teladoc is the fact that management continues to project higher revenues for the third quarter.
In Q2, the company reported $592.4 million in total revenue. For Q3, that number is expected to climb into the range of $600-620 million.
Management has cautioned that the final number could be toward the low end of that range due to market conditions. However, the continued progression of growth would be a major positive for the company.
Is Teladoc Health a Strong Buy?
With all of this said, there are still obvious risks to investing in Teladoc Health. Sustained losses, narrowing free cash flows and hefty debt loads are among the pitfalls that investors should examine in evaluating Teladoc.
The company could also be affected by a general return to more traditional methods of healthcare provision now that the COVID-19 pandemic is beginning to wane.
For investors who are bullish on the future of telemedicine, though, Teladoc is at least well worth considering. The possibility that the stock is oversold presents a potential buying opportunity.
Continued growth in revenue coupled with high margins could also help to mitigate some of the company’s downsides.
Overall, Teladoc is a somewhat risky buy that could pay off for investors who are willing to wait for current market conditions to improve and for the company to mature.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.