2022 has been a terrible year for growth stocks in general. Indeed, the Nasdaq has sunk around 20% year to date, and around 10% over the past year. This has been due to inflationary worries and rising interest rates.
One of the worst performing growth stocks has been Teladoc (NYSE: TDOC), which has now dropped over 80% in the past year. This means that the company is now priced the same as it was following its initial public offering in 2015, despite growing revenues by around 3,000% over the same period. Therefore, I feel that the sell-off in Teladoc has now been overdone, and I’d buy more for my portfolio.
Recent trading update
The company’s recent trading update was abysmal and, on Thursday, the Teladoc share price fell over 40%. But what was so bad about it?
Firstly, the company recorded a non-cash goodwill impairment charge of $6.6bn. This was due to Teladoc’s acquisition of Livongo in late 2020, for which it paid $18.5bn. However, it is now accepted that Teladoc severely overpaid for this acquisition, hence the extremely large impairment charge.
Secondly, revenue guidance for 2022 was lowered from $2.6bn to $2.45bn. It also forecasted Q2 sales of around $590m, which was lower than expected. These reflect the difficult macroeconomic environment, including high interest rates.
However, I still believe that the 44% drop on Thursday was an overreaction. While the goodwill impairment is bad news, it does not affect Teladoc’s cash position. Therefore, from a financial standpoint, Teladoc has not actually lost this $6.6bn — it’s purely an accounting measure. Also, the updated revenue guidance still forecasts revenue growth of around 20% year on year. For a company that current trades at a price-to-sales ratio of just over two, this is strong growth. These are some reasons I feel that this growth stock can now recover.
Other reasons to buy this growth stock
Initially, I bought Teladoc when it fell below $100. While I now recognise that I bought in way too early, the reasons I bought remain intact. For example, there are signs that the telehealth industry is growing, and McKinsey and Company projects that the virtual healthcare market will be able to reach $250bn. This would hugely benefit Teladoc.
Further, the fact that revenues are still growing after the pandemic shows that Teladoc was not only a ‘Covid stock’. This offers some hope for the future and demonstrates that the sell-off may now be overdone.
Finally, after falling over 80% in the past 12 months, Teladoc is now a potential takeover target from other growth stocks, including Amazon or Microsoft. Both these companies are involved in the telehealth sector, and as Teladoc is a market leader, it might be a shrewd acquisition at the current price. Any news of a potential takeover could see the Teladoc share price soar.
Therefore, although it remains a risk, and the sentiment is currently at an all-time low, Teladoc is a stock I’ll continue to buy at these levels. This is because I feel the potential reward far outweighs the downsides.
