Growth stocks have faced a torrid time in recent months. But this is no surprise. Indeed, inflation is at a 40-year high, reaching 7% in the US most recently. As already confirmed by the Fed, and implemented by the Bank of England, this will lead to higher interest rates, making it far more expensive to borrow. High inflation rates also lowers the value of future cash flows, which is where growth stocks obtain a large amount of value. One growth stock that has been particularly beaten down in recent months in Teladoc (NYSE: TDOC). But the telehealth company is still performing excellently, and it now looks undervalued from my perspective.
Due to the extra demand that Covid brought, the Teladoc share price soared in 2020, and reached a peak of $295 in February 2021. But the past year, has not been pretty for the company, and the stock is now priced at just $80. This is around a 70% decline in a year. Further, Teladoc is now priced below its pre-Covid levels.
But this valuation seems entirely detached from the performance of the company. In fact, for full-year 2021, Teladoc expects revenues of over $2bn, over a 90% year-on-year rise. This gives the firm a price-to-sales ratio of under 7. Compare it to Zoom, another beaten-down growth stock, which has a price-to-sales ratio of over 12. Zoom is also seeing slower revenue growth than Teladoc, with a 35% year-on-year rise in the third quarter. Therefore, in comparison, Teladoc looks far too cheap from a revenue perspective. As such, a recovery in the Teladoc share price seems warranted.
It does have to be mentioned that Teladoc is still loss-making though, and it’s not expected to make any profits for the foreseeable future. Significant losses have been caused by the acquisition of Livongo, which in hindsight, may have been overpriced. Indeed, at the time of the acquisition, Livongo was valued at around $18.5bn, while Teladoc is now only valued at around $13bn. But while this unprofitability increases the risk of the shares, I’m willing to overlook it due to the company’s growth in other areas.
Other reasons this growth stock could rise
Teladoc operates in the telehealth industry and has established itself as a global leader in this market. There are also signs that this industry is growing. In fact, McKinsey & Company projected that the virtual healthcare market will reach $250bn. This would certainly benefit Teladoc.
Fears that the company will see reduced demand post-Covid have also not come to pass so far. In fact, in the third quarter of this year, Teladoc still saw year-on-year revenue growth of 81%. This is despite coronavirus being an even more prominent concern in 2020. Such incredible growth demonstrates that the share price fall is not correlated to Teladoc’s performance. Instead, it seems solely due to the general sell-off of growth stocks. I believe that this sell-off has now been overdone. Teladoc, in particular, seems oversold.
Therefore, due to the excellent growth at the firm, and the fact that its price hasn’t been this low since 2019, I will continue to buy more Teladoc shares.
Stuart Blair owns shares of Teladoc Health. The Motley Fool UK has recommended Teladoc Health and Zoom Video Communications. 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.