Why I think the 37% drop in the Teladoc share price is a huge buying opportunity

Cathie Wood favourite Teladoc Health is down 37% in response to a $6.6bn loss. Our writer take a close look at the balance sheet to see what’s going on.

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Key Points

  • The Teladoc share price has fallen 37% in extended trading after its earnings report
  • The company announced a $6.67bn loss, but $6.6bn of that was due to a goodwill impairment
  • Since such an impairment isn't a cash loss, I think the market might be overreacting to Teladoc's earnings report

The Teladoc Health (NYSE:TDOC) share price is down 37% this morning in pre-market trading. The decline is a reaction to the company’s earnings call last night. 

I think that this is a huge overreaction and I’m looking at buying shares for my portfolio as a result. Here’s why.

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Teladoc earnings

At its earnings call last night, Teladoc announced a loss of $6.67bn, or $41.58 per share. With shares trading at $55.99 at the close of trading on Wednesday, it’s down nearly 70% in a year.

It’s not like the company lost that much cash, though. $6.6bn of the $6.67bn net loss came from a goodwill impairment charge. In other words, despite recording an accounting loss of $6.67bn, the amount of cash the company lost was $75m.

This is why I don’t think the report is that bad for Teladoc. The goodwill impairment charge indicates that it overpaid in 2020 for its acquisition of Livongo Health. While that’s not a good thing, it doesn’t mean the company is losing cash.

Teladoc’s management also lowered revenue guidance for the year. Instead of guiding for revenues of between $2.55bn and $2.65bn, management announced expectations of revenue between $2.4bn and $2.5bn.

A buying opportunity?

In my view, a 37% decline is a significant overreaction to a goodwill impairment charge. Given that no cash left the company in the impairment, and given that it accounts for the vast majority of Teladoc’s reported loss, I think that the drop in the share price is a buying opportunity for me.

The stock is volatile and the company is still carrying a substantial amount of goodwill on its balance sheet. That means that there’s a risk of future impairments, but I’m no more worried about them than I am about the one announced in this quarter.

The bigger risk, as I see it, comes from rising interest rates. With the US Federal Reserve likely to increase interest rates by 50 basis points next month, companies that are unprofitable, such as Teladoc, are likely to become less attractive. Nonetheless, I think that there’s a case to be made for Teladoc shares at these prices.

If I were valuing this company I’d use the Warren Buffett method. I’d attempt to estimate how much cash it will produce over time and then try to figure out what I’d be willing to pay today for that future cash.

At around $35 per share, Teladoc’s shares trade at around three times sales. As the company achieves scale and optimises for profit, I expect it to achieve operating margins of between 20% and 30%.

I also anticipate an increase in revenue. Teladoc’s revenues in the most recent quarter increased by just under 25% compared to the first quarter of 2021. With further growth like that on the horizon and a low multiple, I expect big things for this stock from here. I’m happy to add more shares to my portfolio.

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Stephen Wright has positions in Teladoc Health. The Motley Fool UK has recommended Teladoc Health. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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