Talkspace: Attractively Valued With A Promising Outlook For Profitable Growth

seekingalpha08-27

Shares have underperformed this year, despite solid results from the underlying business.Revenue growth remains strong as the company has significantly expanded the number of consumers who have access...

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These developments have significantly expanded the consumer base that has access to Talkspace's services. I foresee a promising outlook for the company, with revenue growth expected to surpass 21% next year, with adjusted EBITDA reaching $19 million. Based on my estimates, shares are valued at an EV/FY25 adjusted EBITDA multiple of 9.7. I find its valuation to be very attractive, despite risks of increased competition and gross margin pressure. Additionally, the company's large net cash position and its potential as an acquisition target, help mitigate downside risk, creating an appealing risk-reward profile. Consequently, I rate TALK stock a Buy. Financial highlights and my expectations for what's ahead Q2 Investor presentation Revenue in Q2 was up 29% year over year to $46.1 million, as shown above. Payor and Direct to Enterprise (DTE) segment revenues grew 62% and 20% year over year respectively, while the Direct to Consumer (DTC) segment saw a decline of 28%. The decline in the DTC segment aligns with management's strategy of prioritizing the Payor and DTE segments over the Consumer business. These trends are contributing to a headwind on gross margins, which have been declining but are anticipated to stabilize at current levels. Management's guidance of $190 million in overall revenue for this year implies 27% year-over-year growth, which suggests an 8% increase in revenue for the second half of 2024 compared to the first half. Looking ahead, I expect this strong growth to continue and forecast next year's growth to be 21%, with revenue reaching $230 million and gross margins staying at around 43%. One of the key factors driving future growth is the expectation for the population covered to grow substantially from 145 million at the end of last quarter, to above 200 million next year, as described by Talkspace's CEO when he stated: Looking forward, we anticipate adding several new Blues plans and regional plans by the year-end. We expect that within the next 12 months, nearly 200 million people, almost two-thirds of the American public will have access to Talkspace through their health insurance. Q2 Investor presentation As shown above, normalized operating expenses have declined sharply as a percentage of overall revenue. This, together with the solid revenue growth in recent quarters, has led to the company being profitable on an adjusted EBITDA basis for the last two quarters. Management's guidance calls for adjusted EBITDA to be $6 million this year, representing a margin of 3%. Looking ahead, I expect normalized operating expenses excluding stock-based compensation (SBC) to remain at around $20 million per quarter heading into next year. As shown from the extract below, the expense reductions thus far have been driven by reducing sales and marketing and R&D spend. I do not see this trend continuing, given that the company needs to maintain marketing spend in order to inform consumers regarding the availability of Talkspace's services under different healthcare plans. Q2 Financial report In line with these expectations, I anticipate adjusted EBITDA of $19 million in 2025, translating to a margin slightly above 8%. The company continues to generate interest income from its substantial cash reserves, as highlighted below. Given the minimal capital expenditures required for its business, adjusted EBITDA serves as a reliable measure of FCF generation. However, SBC remains notably high at around $10 million annually. Investors should monitor this closely to ensure that future returns are not significantly diluted. Management is actively utilizing its $110 million cash position to repurchase shares, adding $25 million to the buyback program last quarter, in addition to the $15 million announced earlier this year. Q2 Financial report TALK stock valuation At the current share price of $1.75, the company has a market capitalization of $294 million. With a net cash position of $110 million, the enterprise value stands at $184 million. Based on management's guidance of $190 million in revenue and $6 million in adjusted EBITDA, shares are valued at EV/Revenue and EV/Adjusted EBITDA multiples of 0.97 and 30.7 respectively. According to my estimates for 2025 of $230 million in revenue and $19 million in adjusted EBITDA, the valuation becomes considerably cheaper with EV/Revenue and EV/Adjusted EBITDA multiples falling to 0.8 and 9.7, respectively. Many of its industry peers such as Teladoc (TDOC) and American Well (AMWL) continue to struggle to demonstrate profitable growth. American Well remains unprofitable, while Teladoc shares currently trade at EV/Revenue and EV/Adjusted EBITDA multiples of 0.66 and 5, with nearly flat year-over-year growth expected for next year. Given my outlook for Talkspace, I consider it to be very attractively valued. Furthermore, Talkspace's focus on mental health, which is a growing and increasingly important area of care, makes it a compelling acquisition target for larger healthcare providers looking to expand their telehealth services. Together with its large cash balance, this should help mitigate significant downside risk for the shares at their current level. Risks to consider Competition In my view, the biggest risk facing the company is the threat from increased competition. Not only does Talkspace contend with numerous competitors in the mental health sector, but major healthcare providers are also increasingly integrating telehealth services, potentially including mental health care, into their offerings. Until now, Talkspace has managed to maintain a leading market position largely due to its well-recognized brand. Margin pressure As the company partners with larger health plans, it is experiencing ongoing pressure on its gross margins. Investors should closely monitor this metric to ensure that it does not adversely impact overall profitability. Economic Downturn The company's DTC business is likely to be affected by any economic downturn, though it contributes only a smaller portion of overall revenue. Additionally, the company's payor segment requires consumers to make a copayment at the time of service, which could also face challenges in a weak economic environment. Buy TALK stock  Despite the outlined risks, I find the current share price to be highly attractive given the company's promising growth prospects and improving margins. 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