Shareholders of telehealth company Teladoc Health ( TDOC -4.58% ) have gone from feeling like heroes as the stock grew by leaps and bounds during COVID-19 lockdowns to zeros after the stock has fallen 75% from its nearly $300 high. Large share price swings like this are understandably frustrating for investors.
But looking forward is the name of the game, and that's the best course of action for investors looking at Teladoc Health. The good news is that the stock's brutal sell-off has priced it at a bargain-level valuation that could reward patient investors moving forward, and here's why.
Image source: Getty Images.
Growing beyond the pandemic
It's not a secret that Teladoc benefited from COVID-19. The lockdowns and reluctance for patients to seek in-person care resulted in increased demand for digital services, for which Teladoc is a leading provider with 53.6 million paying users. You can see in the chart below how the company's revenue growth accelerated from roughly 40% before the pandemic to triple digits, fueled by a surge in business and the addition of Livongo in 2020.
TDOC Revenue (Quarterly YoY Growth) data by YCharts
Revenue growth now seems to be reverting to its pre-pandemic pace, which may have caused investors to dismiss Teladoc as a "COVID stock" that needed the pandemic to grow. But is this true?
Management recently projected revenue growth of 25% to 30% annually through 2024. This is on top of the "bump" it got in 2020 and 2021, so it's not losing its COVID-driven growth; it's building on top of it. In its recently reported fourth-quarter 2021 earnings report, it set expectations for 2022 revenue of $2.55 billion to $2.65 billion.
Jumping over low hurdles
Valuations play an essential role in determining how stocks perform as investments. I like to think of a stock's valuation as the market's expectation for a given company. If a stock has a very high valuation, the market is expecting big things from the company.
Applying this to Teladoc, it seems like the market has dramatically lowered its expectation for how the company will perform moving forward because the valuation has fallen. You can see in the chart below how the stock's price-to-sales (P/S) ratio is now less than it was before COVID-19! Sometimes, the sentiment pendulum swings very far in both directions.
TDOC PS Ratio data by YCharts
It's tough for a stock trading at a high P/S ratio to support that valuation for a long time. Sure, growth exploded during the pandemic and pushed that ratio to 24, but the stock aggressively repriced itself as that growth began to slow back down.
But with a P/S of 5, that's a much lower bar for the company to jump over. Even if the stock's valuation stays this low forever, it still offers investors 25% to 30% annual returns if the company meets its revenue guidance through 2024. That's why valuation matters.
Reasons to be optimistic
Teladoc could also win back investor sentiment as we move further beyond the pandemic over the coming quarters and years. The company could shed its label as a "COVID stock." It launched its integrated service Primary360 in late 2021, which houses all of Teladoc's services, like primary care, mental health, and chronic condition treatment, under one platform.
It also recently announced a partnership with supposed competitor Amazon to enable compatibility between Teladoc and Amazon's Alexa virtual assistant technology. Teladoc is more than a company for setting up video calls with a doctor -- and as long as it keeps innovating and hitting its guided growth numbers, investors could do well on the stock over time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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March 03, 2022 at 10:23PM
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Teladoc: When Valuation Sets a Low Bar - The Motley Fool
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