Stocks to sell

Teladoc Health’s Vital Signs Are Not Getting Better

Medical health services company Teladoc Health (NYSE:TDOC) has seen its prognosis go from bad to worse over the past month. TDOC stock had already plunged as part of the broader selloff in speculative technology companies. However, that selloff accelerated dramatically following Teladoc’s latest earnings report, which was a disappointment on almost all fronts.

The terrible news started with the company’s headline earnings figure. The company lost more than $40 per share last quarter, or more than the stock is currently trading for entirely. That earnings number isn’t a misprint either; Teladoc did really lose $6.7 billion last quarter on an accounting basis. However, almost all of that was due to the firm writing off a large chunk of goodwill from its acquisition of telehealth company Livongo. Teladoc bought Livongo back during the pandemic remote services boom, and — with hindsight — ended up paying far too generous a price. It’s not as bad as it first sounds, however, as Teladoc paid for Livongo with its own high-valued stock rather than cash.

The bigger issue for Teladoc isn’t the shocking headline loss. Rather, it’s the fact that profit margins unexpectedly slumped 150 basis points this quarter. This came despite management giving upbeat guidance not too long ago. This sudden deterioration in business performance led to a rash of downgrades and price target cuts. The fall in profit margins also caused Teladoc’s earnings before interest, taxes, depreciation, and amortization (EBITDA) to fall despite growth in top-line revenue. The company also trimmed guidance going forward.

That’s not all. Teladoc’s mental wellness operation BetterHelp also may face issues. The service has faced concerns around its privacy and user data protections. Management also noted that its costs to acquire new BetterHelp customers have surged, which could limit further growth. More broadly, there’s also a growing debate around the use of telemedicine therapy and counseling services and their potential excessive willingness to prescribe prescription drugs for mental health conditions. This week, Softbank-funded telemedicine firm Cerebral agreed to stop issuing new scripts for drugs such as Adderall and Ritalin after a report surfaced suggesting that Cerebral was trying to prescribe stimulants to all its ADHD patients to increase customer retention.

It’s rough enough for speculative technology companies right now. The sector is out of favor and quarterly results are up against impossibly strong comparisons from early 2021 during the height of the stay-at-home era. Teladoc would be having trouble regardless. But throw in a sharp miss against guidance, falling profit margins, and that massive Livongo write-off and it’s understandable why traders are rushing to sell TDOC stock even after its massive crash.

On the date of publication, Ian Bezek 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.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.