TALK - Talkspace Stock: Online Mental Health Provider With Several Tailwinds Into 2024

2023-09-23 06:15:40 ET

Summary

• Talkspace is reporting strong growth across its online mental health treatment platform.
• Management expects the company to reach breakeven adjusted EBITDA by Q1 2024.
• We expect shares to remain volatile but see significant upside potential if the financial strategy maintains momentum through next year.

Talkspace, Inc ( TALK ) is a virtual healthcare provider specializing in psychiatric therapy and mental health services. Individual subscribers, couples, and employer-sponsored plan members can meet with a licensed therapist for personalized treatment via live video, audio, or chat sessions.

While the stock has been extremely volatile since the company's 2021 IPO amid a reset of valuation, the setup this year has been something of an emerging turnaround. Indeed, Talkspace is reporting a resurgence of growth and improving financials, with the stock now trading near a two-year-high.

There's a long road ahead for Talkspace to achieve recurring profitability, but our take here is that the trends are encouraging. 2024 is set to be a critical year for the company, where it has the potential to demonstrate its financial strategy works at scale. Overall, we believe the positive outlook should keep shares with upside potential going forward.

TALK Financials Recap

TALK reported Q2 earnings back in late July with a GAAP EPS loss of -$0.03, although this figure came in at $0.02 ahead of expectations. Revenue, of $35.7 million, climbed by 19% year-over-year and also beat estimates.

A major theme has been the growth in "B2B Payors" and "Direct-to-enterprise" business reflecting partnerships with Employee assistance programs (EAPs), health insurance plans, other telehealth providers, and even educational institutions like colleges and universities.

B2B and DTE revenues increased by 58% and now represent nearly three-quarters of the business. This balanced a 41% decline in the smaller direct-to-consumer side, which is consistent with the strategic shift to focus on more corporate opportunities.

As an operating benchmark , the number of eligible B2B patients across all partnerships reached 110 million people, up 42% y/y. The number of completed live B2B sessions at 202.5 thousand is up 110% y/y. Management believes these metrics are indicative of user engagement and positive platform experience.

The effort was good enough for the gross profit to reach $17.8 million, up 22% y/y. This also captured the success of controlling costs, as expenses have declined by -30% y/y, a big reason for the Q2 earnings surprise. The result is that the adjusted EBITDA loss narrowed to -$4.0 million compared to -$15.0 million in Q2 2022

Talkspace sees full-year revenue between $137 and $142 million, representing an increase of 18% at the midpoint. Notably, this target was revised higher from a prior estimate of around $132.5 million. Similarly, the full-year adjusted EBITDA loss guidance has narrowed to between -$16 and -$19 million. The company believes that the figure will approach break-even by Q1 2024.

Finally, Talkspace ended the quarter with $126 million in cash against zero debt. We view this balance sheet position as a strong point in the company's investment profile.

What's Next For TALK?

When looking at Talkspace, the first point here is that it's not the only game in town when it comes to telehealth service providers. Teladoc Health, Inc ( TDOC ) is doing more than $2.5 billion in annual revenue and is recognized as the segment leader. There are also smaller players like Doximity, Inc ( DOCS ) and American Well Corp ( AMWL ) each with a variation of a similar business model. We can also place Hims & Hers Health ( HIMS ) in that category, focusing on personal care and hair loss treatments.

That being said, Talkspace stands out with its specialization in psychiatric treatments and mental health therapy. This is important because the understanding is that this type of clinical management is conducive to regular and recurring online therapist sessions as a part of a long-term treatment plan. This is in contrast to other types of general healthcare issues that may only require a one-time visit or more standardized medication.

Simply put, therapist sessions are a more high-value area of telehealth, which is a strong point for Talkspace to build a brand reputation. With mental health awareness growing in recent years, data suggests that more and more people are seeking therapy for issues like anxiety and depression as a high-growth area of healthcare overall. With therapists in short demand, online treatment is a good option for many patients.

According to consensus estimates, the expectation is that Talkspace can maintain double-digit annual revenue growth over the next several years, with a path to turn profitable by 2025.

The bullish case for the stock is that there is an upside to these estimates, and we'd make the case that the company could even achieve positive EPS by next year based on the latest trends.

In terms of valuation, keep in mind that with the net cash balance sheet position, Talkspace with a current market cap of around $330 million is closer to $200 million on an enterprise value basis. This is a reasonable figure, in our opinion, for a company on track to post $140 million in sales this year. It gets more interesting into 2024 if adjusted EBITDA trends positively and there is evidence the operating momentum can be maintained.

Final Points

While leaning bullish, we officially rate TALK as a "hold" implying a neutral view on the direction of the stock over the near term. This considers that shares are already up more than 220% year-to-date, which has likely already incorporated many of the positives.

There's a lot to like about the company, but we'll want to see more over the next few quarters to confirm the financial momentum has legs to pull the buy trigger. Either way, it's a stock that deserves to be on more traders' radars, with significant long-term upside potential.

We mentioned the telehealth space is crowded, which poses a risk that either a smaller player or more established name makes a bigger push into the mental health side, contesting Talkspace's market opportunity.

The company is also exposed to volatile macro conditions, where a broader economic slowdown would likely pressure demand for therapy services, particularly on the side of the direct-to-consumer business. Monitoring points through the rest of the year include the number of B2B sessions, along with trends in the gross margin and cash flow.

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