Why Teladoc Health lost 64% in the first half

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What happened

Shares of Teladoc Health (TDOC -2.52%) have come under fire this year as the telehealth company is one of several unprofitable growth stocks that have fallen sharply this year. As of June 30, it was down 64%, according to data from S&P Global Market Intelligence.

A weak second-quarter earnings report, which included a massive writedown and lower guidance, helped sink the stock, as did shifts in market sentiment. Investors may also have begun to believe that Teladoc, which is often seen as the leader in telehealth, may lack a sustainable competitive advantage. The future of telehealth also looks uncertain after the pandemic gave it a temporary boost.

As you can see from the chart below, the stock has been on a downward trajectory for most of the year.

TDOC data by YCharts

So what

Teladoc’s first-quarter results best explain why the stock has lost more than half its value this year and is down nearly 90% from its peak at the start of the pandemic.

The telehealth stock fell 40% on April 28 as the company announced a $6.6 billion goodwill impairment for its 2020 acquisition of Livongo Health. At the time of the deal, Teladoc paid $18 billion for Livongo in an all-stock deal. The writedown not only showed that deal was a failure, but also cast a shadow over the company’s growth strategy, which has grown largely through acquisitions in recent years. If Livongo’s deal mirrors its other acquisitions, Teladoc could waste its shareholders’ capital.

The company also cut its guidance in part due to weak performance from BetterHelp, its mental health division, which is being hit by new competition offering low-cost alternatives.

Several analysts downgraded the stock following the earnings report, a sign that the market was losing faith in Teladoc’s management. Although the company is profitable on an adjusted earnings before interest, tax, depreciation and amortization basis, it continues to lose money on a free cash flow and generally accepted accounting principles (GAAP) basis.

Now what

Teladoc’s forecast cut also set off alarm bells, as management had previously told investors it could deliver 25-30% revenue growth through 2024. However, it now expects revenue of only $2.4 to $2.5 billion, a growth of less than 20%.

This is proof that Teladoc’s growth story could come to a halt, which is especially problematic for a company that is not profitable. While telehealth providers are expected to gain market share from traditional providers, there is no doubt that Teladoc faces growing competition, especially from Amazonand its slowing growth makes its vast addressable market virtually irrelevant.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jeremy Bowman holds positions at Amazon and Teladoc Health. The Motley Fool holds posts and recommends Amazon and Teladoc Health. The Motley Fool has a disclosure policy.

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