A Cathie Wood tech stock I think is severely undervalued

Cathie Wood’s ARK Innovation Fund has struggled this year due to the tech stocks sell-off. Here’s one such stock it holds with strong growth prospects. I’d buy more today.

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Cathie Wood is one of the most prominent investors in the US and last year her flagship fund, ARK Innovation, delivered a 170% return. Nonetheless, things in 2021 have been far less pretty for her fund, as many investors have stayed away from tech stocks, due to lofty valuations and the risks of inflation. Nonetheless, while there are certainly risks to investing in some US growth stocks, I think that Teladoc (NYSE: TDOC) is severely undervalued. Here’s why.

Cathie Wood has been buying the dip

Teladoc is the largest telehealth provider in the world. But after reaching highs of nearly $300 at the start of February this year, it has now dropped back to under $100. This has made Teladoc one of the worst performing tech stocks and it has even dipped below pre-pandemic prices. Nonetheless, as the stock has dipped, Cathie Wood has continued to buy. She currently owns 11% of Teladoc shares.

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One reason may be due to optimism that, after rising in popularity during the pandemic, telehealth is set to grow over the next few years. In fact, consultancy firm McKinsey & Company estimates that the US virtual care market could reach $250bn. As Teladoc is the current market leader, this is a very good sign.

Further, it has continued to report decent results. This includes expected full-year revenues of over $2bn, around a 100% rise from last year. In the recent third-quarter results, it also reported over 80% year-on-year revenue growth, despite fears that previous growth had been a one-off due to the pandemic. As such, this demonstrates to me that the recent dip in the share price has been overdone.

What are the risks?

Yet despite the company performing well, there are still some issues. For example, it continues to post large losses, and this year it expects an EBITDA loss of around $17m. With tech stocks, while I don’t mind operating losses, I like to see positive EBITDA as this shows a clear route to net profitability. Therefore, this is a key risk for the shares that must be considered.

Furthermore, there is also the risk of inflation, which is no longer being described as temporary. Inflation is particularly damaging for growth stocks because it lowers the value of future cash flows. This is where these growth stocks obtain a large amount of their valuation. If interest rates rise in the US, which is expected next year, it will also make it more expensive to borrow.

What am I doing about this tech stock?

I already own Teladoc shares, and I’m still optimistic for the long term. Indeed, I feel that the company is sacrificing short-term profitability to capitalise on long-term growth potential in an innovative sector. The company’s extremely large revenue growth offers me hope that this strategy is working. Therefore, despite the risks that face the company, Teladoc looks far too cheap in my opinion. I may buy some more, as I hope for a large rebound next year.

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