Telehealth stocks had a good run, but now they’re sick. Here’s what to do
Good news on the fight against the COVID-19 pandemic is translating into bad news for companies that provide telehealth services in Canada and the United States: Their share prices have crumbled as demand for online health consultations has lost some of its urgency.
Some observers expect that the nascent sector – home to a number of well-received initial public offerings within the past year – can reward investors over the longer term, underscoring the argument for buying these stocks when they’re out of favour.
But you’ll need a lot of conviction to buy into a deep bear market.
Among telehealth companies trading on the Toronto Stock Exchange, MindBeacon Holdings Inc.
, which offers online mental-health services, has fallen 73 per cent this year. Well Health Technologies Corp. , which is expanding into U.S. health care and joined the S&P/TSX Composite Index in September, is down 17 per cent. Dialogue Health Technologies Inc.
, whose shares made their debut in March, has fallen 66 per cent from its record intraday high. Lifespeak Inc. , another newcomer, has fallen 34 per cent since July. U.S.-based telehealth companies are also struggling, suggesting that the downturn is not connected to publicly funded health care. Telemed Inc.
has fallen 71 per cent this year, and Teladoc Health Inc. has seen its share price cut in half since February. You can blame the vaccine rollout for these awful numbers, as investors turned from lockdown themes toward areas of the market that stand to benefit from a return to normal lifestyles. It hasn’t helped that many telehealth companies are new to the public, with brief histories and quarterly losses. How they’ll fare in a postpandemic world remains highly uncertain.
“We haven’t yet got into the post-COVID world. We are still in a transition period,” Jailendra Singh, an analyst at Credit Suisse, said in an interview.
This transition period has gone on longer than expected, he added, giving an opportunity for other players – including insurance companies – to enter the market, contributing to noise and confusion for investors.
The case for telehealth rests on the idea that it offered indispensable care during lockdowns, when in-person visits were limited. The sector could become key to improving health care in the future by making it more convenient and accessible.
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According to a July report by McKinsey & Co., the use of telehealth services in the United States during the depths of the pandemic – in April, 2020 – was 78 times higher than it was two months earlier, before lockdowns began.
Even though telehealth use has subsided from this peak, it appears to have stabilized over the past year at about 38 times higher than prepandemic levels, with psychiatry and substance-use disorder treatment accounting for the biggest share, according to McKinsey.
Admittedly, the base for this impressive growth is very small. Still, the consultancy estimates that up to US$250 billion of U.S. health care could eventually become virtual, compared with an estimated US$3 billion in annual revenues at existing telehealth firms before the pandemic. This suggests that there is a lot of potential for growth here.
How should brave investors approach this beaten-up sector?
A number of analysts are convinced that stocks will recover, and are generally supportive of attempts to diversify through acquisitions so that companies can offer more services to more people.
Canaccord Genuity analyst Doug Taylor argued in late October that LifeSpeak’s acquisition of ALAViDA, which deals with substance-use disorders, can add cross-selling opportunities for the company’s base of employers and employee assistance programs.
He thinks the stock can rebound to $13 within 12 months, implying a return of 78 per cent.
As for growth metrics, Mr. Singh recommends looking more closely at operational growth rather than profitability, since most of these companies are investing in their businesses and building scale right now. One number to watch: PMPM, or per member per month revenue, which reveals how much each customer is spending.
Even so, bullish bets could take time, given that declining sentiment may not have hit bottom yet.
“Until we get clarity, I think shares will remain volatile,” Mr. Singh said.
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