The past 12 months have been a rough journey for many growth shares. As uncertainty surrounding inflation and interest rates became elevated, many high-flying businesses have watched their stock prices plummet. One such company from my portfolio is Teladoc Health (NYSE:TDOC).
Let’s explore what this business does, why it’s down, and whether now is actually a good buying opportunity for me.
The rise and fall of Teladoc Health
The telemedicine company provides virtual care solutions, enabling its customers to quickly get in touch and discuss various health concerns with doctors from the comfort of their own homes. Needless to say, demand for such a service skyrocketed in 2020 when the pandemic forced everyone to stay indoors.
By the end of the year, the number of paying users in the US jumped from 35 million in 2019 to 51.5 – a 47% increase. Consequently, total revenues nearly doubled, reaching $1.09bn, and the share price erupted.
Throughout 2020, shares of the growth stock climbed an impressive 150%. But today, that gain has been completely wiped out because over the last 12 months, it has collapsed by nearly 70%! What happened?
Looking at the latest earnings report, user growth has begun to slow considerably from 47% all the way down to 2%. At the same time, the business, which was on the verge of becoming profitable, suddenly saw its net losses explode from $99m in 2019 to $485m in 2020 and $418m during the first nine months of 2021.
After seeing this, I think it’s pretty understandable why investors decided to run for the hills. But getting deeper into the numbers, a very different picture is painted.
Digging a bit deeper
The slowing user growth is concerning. However, despite this, the expansion of the revenue stream has actually accelerated. In the latest results, total revenue jumped 108% to $1.48bn. The surge can be partially attributed to the massive $18.5bn acquisition of Livongo in 2020. But if the top line is growing in the triple-digit range, what happened to the bottom line of this growth share?
Acquisitions of this size take time to digest, and it can be an expensive process. Breaking down the $485m loss in 2020 shows that $88.2m consisted of integration expenses, with a further $386.4m in stock-based compensation. But both of these costs are one-time only. In other words, they’re not repeatable.
A similar story can be seen with the net losses in the first nine months of 2021. Of the $418m, $241m originates from stock awards that continue to be vested from the Livongo acquisition. With a further $134m on writing off acquired intangibles – a common process during large-scale acquisitions.
Time to buy this growth share?
So, what does all of this mean? Despite what the fall of this growth share would suggest, Teladoc as a business appears to be doing rather well. However, it’s still digesting its acquisition of Livongo, which is dragging its profits into the red.
Personally, I will wait for the full-year results to come out later this month before deciding whether or not to increase my position.
