- Teladoc (TDOC) stock is going the wrong way, for good reason this time
- In spite of the hate, eventually it will make sense to the masses once more
- The murkier the opportunity, the bigger the potential reward
The pandemic and the lock downs that resulted from it changed things forever. Suddenly old concepts emerged as new sustainable trends. One of those is the concept of telehealth where Teladoc (NYSE:TDOC) stock lives. Today I will make the pro-bullish argument and feel guilty about it. If its opportunity is in a popular segment, I should have strong confidence in my point. I don’t, but I do see an opportunity out of extreme fear and confusion.
The setup is for the right investor frame of mind. Trading TDOC after such a violent move must only be as a speculative bet. No logic can justify going all in with force at this stage and without further proof. The value has a way of emerging late, then the hordes of investors follow. The early birds get the bigger chunk of the worm. But getting too early will results in premature pain.
The market opportunity for the sector makes sense. Much like the telecommuting, the idea of telehealth has been around, but not to a serious degree. The pandemic legitimized the need for it and on a wide scope. In 2020 and under lock down, we desperately needed Teladoc services. Demand for their services exploded higher and so did the stock. The company burst onto the scene, and they could hardly keep up with demand. Suddenly we all needed to speak to medical professionals and asap.
The Problem Started with a Mega Rally
While the user metrics were impressive, the bids on TDOC stock were even more. The rally from early 2020 was enormous, and by the summer it had already gained more than 205%. The bulls finally ran out of steam, almost exactly a year after the pandemic breakout started. Critics were many and they argued that the rally was too impressive. And in hindsight they were right, as the fall from grace happened at neck-break speeds.
From those highs, Teladoc has lost more than 90% of its value this week. Just yesterday, it crashed 40% in a negative reaction to its latest earnings report. Management delivered convincingly bad news, which spooked the two fans that TDOC still has. But this is where it gets interesting, because the stock is now back to old pivotal levels. Current prices have been in contention since the early stages of its IPO. Investors battled over them for two years until the established them as footing.
In 2018, the real rally started, and by the time the pandemic hit Teladoc was up +125%. Clearly this is a fast moving stock that requires intestinal fortitude from its investors. The way to handle such volatility is to do a deep dive into homework. Studying the business opportunity would empower investors to have conviction.
However, in the current conditions we must remain humble on that front. Going all in is asking for trouble because of extrinsic factors. Stocks do not trade in a vacuum, and they ride market momentum. Currently Wall Street is reeling from a handful of very serious risks. The two main ones come from the war in the Ukraine, and the threat of a violent Federal Reserve. Either of those two have the capacity to cause a stock market crash. Regardless of how good the opportunity that exists in Teladoc, there are outside risks looming.
TDOC Stock Should Have Support Soon
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Technically when a stock falls back into a significant zone of contention like this it finds footing. But since the battles happened more than four years ago, they won’t be sharp lines of support. Think of them as mattresses providing a soft landing after a hard fall. Using options can mitigate some of the risk of catching a falling knife this big.
The business metrics are not horrific on paper. As long as they can operate without bleeding cash, they should continue to execute on plans. Last year, they generated $200 million in cash from operations. If this repeats, then they could finish the years strong. Stocks more more on relative aspect of performance to expectations. This week, investors lowered their bar for TDOC to the ground.
Those who are still holding shares are less likely to shake out now. The time to panic has passed therefore arguably TDOC stock is in stronger hands. Near $22 it is not likely to be a major financial catastrophe to own some. The GDP report this week printed a -1.4% versus the expectations of the opposite growth. This comes ahead of next week’s Fed decision on interest rates. Maybe the weakness would soften their rhetoric a bit.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.