Talkspace: A Deserved Decline May Have Gone A Bit Too Far
Summary
- Even by the standards of the SPAC bust, Talkspace has been a notable underperformer.
- There are a number of good reasons for a decline, including margin compression, sector pressure, and a clear risk to the long-term revenue outlook.
- Still, a 60%-plus decline does seem potentially overwrought, and there are some potentially transitory factors at play.
- The short- and long-term concerns are real, but investors willing to catch a falling knife should take a look at TALK stock.
Luis Alvarez/DigitalVision via Getty Images
According to SPACTrack.net, 147 de-SPAC transactions (mergers between operating companies and special purpose acquisition companies) have closed so far in 2021. Exactly two have performed worse than Talkspace (NASDAQ:TALK) stock.
At Friday's close of $3.84, Talkspace stock is off more than 60% from its merger price - less than four months after that merger closed. Only Ensysce Biosciences (ENSC), an early-stage drug developer that raised only a small amount of capital, and ATI Physical Therapy (ATIP), which tanked its first quarterly report, have performed worse.
It shouldn't be a surprise that Talkspace stock has fallen. The case for the behavioral telehealth provider has weakened noticeably, in a number of ways, since the company announced plans to merge with SPAC Hudson Executive back in January. Seeing TALK as a $10 stock simply because it merged at $10 (and institutional investors were willing to pay $10 in a concurrent PIPE, or private investment in public equity, financing) is a classic case of "anchoring bias."
That said, it is fair to argue that the decline has gone too far. A 5.2% rally in Talkspace stock on Friday suggests at least some traders are making that case. There's still a legitimate business serving a huge market, one that is in the very early innings of its growth. Margin pressures seen this year are a clear disappointment but are due in some part to potentially short-term factors.
Catching a falling knife is always dangerous, and the single-session gain on Friday isn't enough to remove that risk. But for investors willing to take that risk, TALK at the least looks intriguing here.
Why Talkspace Stock Has Plunged
There are three core reasons for the decline in TALK stock. The first is a notable change in sentiment toward the telehealth space more broadly. When the merger was announced in January, Talkspace itself highlighted Teladoc Health (TDOC) and Amwell (AMWL) as peers:
Slide from Talkspace merger presentation, January 2021
Talkspace
The multiples cited in the presentation have compressed for all three stocks:
According to the proxy statement filed for the merger, Hudson Executive's management team itself used TDOC and AMWL as peers for a relative valuation analysis. The ~50% blended decline in those two stocks on its own suggests a revaluation of TALK stock to the $6 range (given post-merger cash of about $250 million).
Talkspace is facing a pair of fundamental pressures as well. Most notably, profits have significantly disappointed. In the first quarter, Talkspace's Adjusted EBITDA loss expanded to $10.6 million from $7.5 million the year before. Q2 was even worse: EBITDA worsened sequentially to -$11.9 million after the company had nearly broken even on that basis the year before.
The culprit here is primarily sales and marketing spending. In 2020, even excluding stock-based compensation (which spiked this year), sales and marketing spend totaled 60.6% of revenue. That was an 11-point improvement against the year before, as nearly 100% top-line growth drove operating leverage.
In the first half of 2021, however, sales and marketing spend (again, excluding share-based comp) soared to 76.8% of revenue against 59.1% in 1H 2020. On a GAAP basis, the performance was even worse: sales and marketing spend took up 84% of revenue, increasing 180% year-over-year.
That spending is simply untenable - and it's clearly unplanned. At the time of the merger, Talkspace projected an Adjusted EBITDA loss of just $12 million for the entire year. Through the first half, the company instead lost $22.5 million, and on the Q2 conference call chief financial officer Mark Hirschhorn said Q3 was "experiencing very similar metrics."
Adjusted EBITDA loss for the year is tracking toward more than $40 million, likely ~$30 million weaker than expected. Somewhat incredibly, that means EBITDA margins will be roughly 25 points worse than Talkspace projected in January.
Talkspace has reiterated its top-line estimate for the year. But that's not necessarily good news, either. The company's B2B business has outperformed expectations, which means that Talkspace not only is spending far more than planned on customer acquisition but isn't seeing the results on the B2C side it had projected.
Meanwhile, sequential growth is slowing. After a 15% print in Q2, Q3 guidance suggests an increase of just $1 million, and the full-year projection implies an additional high-single-digit improvement in the fourth quarter to about $35 million.
The problem with that latter figure is that at the time of the merger, Talkspace was looking for $205 million in 2022 revenue. It seems likely to exit this year at an annualized rate of ~$150 million - which alone raises serious risk to next year's projection.
All told, nothing here is going according to plan. Combine peer-driven multiple compression, margin erosion, and what looks like lower mid-term top-line expectations, and a 60% decline seems not an opportunity, but a logical reaction from the market.
At the very least, those three pressures should erase any idea that TALK stock is "cheap" simply because it traded at $10 a few months ago. Much has changed over the past two quarters.
The Case For Staying Away
And so it's important to look at Talkspace with something like fresh eyes. Hypothetically, if Talkspace were going public this week with a ~$650 million fully diluted market capitalization and a ~$385 million enterprise value, would TALK stock look like a buy?
The simple answer is: probably not. EV/revenue based on 2021 guidance still is over 3x. Adjusted EBITDA margins this year are tracking to be worse than negative 30%. While revenue this year should increase in the range of 70% against 2020's $74 million, sales and marketing spend alone suggests the company is buying at least a solid chunk of that growth and paying a premium to do so.
There's one more big concern here: competition. Talkspace has estimated a massive addressable market: $73 billion in the U.S. in 2019, and $273 billion globally on a "fully-treated" basis (i.e., assuming patients who need mental health services get them). That is a huge market, and one likely to grow in terms of telehealth penetration, but it absolutely is not a market Talkspace has to itself.
Teladoc itself is perhaps the rival furthest ahead. That company did more than $300 million in behavioral health revenue in 2020 under its BetterHelp brand and guided for growth of more than 50% this year (and appears to be on track toward that bogey). After Q2, that company announced the launch of myStrength Complete, the first product integrated by Teladoc and its recently acquired Livongo Health.
Even before that launch, Teladoc's revenue in the space seems likely to be nearly 4x that of Talkspace. If myStrength Complete accelerates its penetration while Talkspace's growth decelerates, the gap will only widen.
Lyra Health raised $200 million in June. Talkspace chief executive officer Oren Frank told Business Insider in January that Lyra has "smart people doing good work." Doctor On Demand brought in $75 million in capital last year; Ginger $150 million over the last two years; MDLive $173 million to date.
Telehealth services in behavioral health undoubtedly will see greater adoption. That alone isn't a reason to own TALK stock, even at this valuation. If the company doesn't prove to be a winner in the space, let alone a leader, more of that ~$385 million EV can erode.
The Case For TALK Stock
The discussion so far suggests TALK might still be a good short, let alone a buy. But there are some reasons for optimism, and even for investors to consider a long position in the stock despite the myriad risks.
The most significant is the likelihood that some of the margin pressure is transitory. What has led sales and marketing spend is sharply higher online advertising costs, particularly at Alphabet (GOOG) (GOOGL) unit Google, as well as social media giant Facebook (FB).
Those soaring costs are not specific to Talkspace. Prices are soaring for all buyers. Teladoc itself seems to be dealing with similar pressures, as an analyst noted on that company's first quarter call. (Teladoc management didn't dispute the assertion, but instead pointed to higher-than-expected lifetime values as offsetting the apparently increased customer acquisition costs.) And Hirschhorn said on Talkspace's Q2 call that "we do believe CAC will stabilize because these are, quite frankly, levels... that we don't believe are sustainable."
The competitive nature of the space may make the comment too optimistic; smaller rivals, in particular, may have no choice but to pay the prevailing rate since the alternative of flattish or negative revenue growth is a death knell for their businesses. But the shift to B2B also mitigates that issue; those customers (acquired through health plans or direct agreements with large employers) have lower profitability but substantially lower acquisition costs.
Broadly speaking, the pandemic has disrupted essentially every market; telehealth clearly isn't any different. Talkspace's balance sheet gives the company time to adjust, and there is some value in the brand which has established some reach to this point.
As for the revenue growth, it does seem close to certain that projections for 2022 and beyond will prove too optimistic. But there's still some overall sequential growth going on, which suggests the potential for a further increase next year. The B2C business had a soft Q2 in terms of users, but length of stay on the platform still is in the five-month range. Talkspace is bringing on therapists as employees, and their utilization should ramp and provide some margin help. Live messaging should improve the offering. Again, the B2B business has outperformed expectations, with direct to employer plans doing particularly well.
In this new environment, the core value proposition and qualitative bull case still exist. Mental health demand is going to rise. Telehealth offers a compelling alternative with advantages against in-person visits even after the pandemic. It's fair to give Talkspace some time to readjust. It's fair to not write the company off just yet.
The Verdict
Despite the risks, it's hard to not be at least a little bit intrigued here. This isn't an unjustified sell-off in the sense that the market is blindly selling off TALK stock, but there is at least the possibility that Talkspace is simply dealing with the combination of growing pains and a massively unsettled market. Given that the company's enterprise value has declined an incredible 72% from the SPAC price, that possibility suggests an upside.
Two core concerns keep the case from being compelling, at least not yet. The first is the timing issue. There's little evidence of much improvement in Q3 results, due next month. There's also a lock-up expiration to deal with in December. The bottom may well not be in.
The second is Talkspace's position in the space. The decline in telehealth stocks no doubt is part of the selling of "pandemic winners" that has hit the likes of Zoom Video Communications (ZM) and Peloton (PTON). But amid that correction, it does seem wiser to target larger, broader plays (even Amwell has revenue more than double that of Talkspace) as opposed to a company that isn't the leader in its field.
This is a stock worth watching, however, either for further declines or some signs of improvement in the Q3 report next month. As bad as the news has been over the past few months, there's still time for Talkspace to turn the trend around.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (46)
I'm holding. I sold a lot of 2.5 April puts before which are basically breaking even now. Still very cheap at this valuation, hope they can find a good CEO soon.
I don't think buying this is in the 5s was unreasonable, and I definitely think it's possible that winds up being a pretty good trade if they can string together a good quarter or two.
Rather than catching a falling knife, the main risk seems to be drowning in a sea of shares set to flood the market.
But it does go to the near-term issue: between that and the lack of evidence for a better Q3, not sure why even more bullish investors need to be buying now other than just playing a relief rally.
"my anecdotal sense is that those deadlines often are much ado about little"
These SPACs are averaging ~15% declines on the day of the PIPE registrations alone, and that's typically less than 10% of the FD shares out. They are all toxic, regardless of fundamentals. It's simply supply/demand imbalances.