TALK - Talkspace: Strong Q3 Buy The Dip

2023-11-07 02:35:04 ET

Summary

• Talkspace, a mental health app, has seen its share price drop after reporting strong Q3 earnings, creating a buying opportunity.
• The company raised its full-year revenue growth outlook and expects to be breakeven from an adjusted EBITDA standpoint by Q1 2024.
• Talkspace benefits from the destigmatization of mental health, broader coverage of mental health services, and a focus on the enterprise market.
• The stock trades at less than <1x FY24 revenue.

With interest rate fears quelling and stock markets rising again, a common question investors have is: how can I beat the markets when forward P/E multiples are looking rich again? How can I protect myself if downside sentiment kicks in again?

My answer has always been to lean in on "growth at a reasonable" price stocks, where very attractive opportunities sit in the small and mid-cap space. Talkspace (TALK), in particular, is one of these companies. The mental health app, whose tagline is "feeling better starts with a single message", has already seen its share price more than double since the start of the year - but since reporting Q3 earnings earlier this month, the stock has taken a double-digit tumble, creating a strong buying opportunity.

I initiated Talkspace last month at a Bullish rating, when the stock was trading closer to $2 per share. Since then, the company has released what I consider to be very strong Q3 earnings results as well as a guidance increase, while also seeing a >20% dip in share prices. For that reason, my conviction in Talkspace has only grown - and while I think small caps are more prone to be dislocated in value relative to the broader market which may mean a rebound will take time, I am upgrading my viewpoint on Talkspace to very bullish.

First things first: alongside Q3 results, the company also raised its full-year revenue growth outlook to 22% y/y, three points higher than the prior high end of its range.

It's also updating its estimated cash balances by ~20% ($20 million) at the end of Q1 of 2024, which is when it expects to be breakeven from an adjusted EBITDA standpoint (which is quite a feat for a company of its relatively small scale). We note as well that so much of Talkspace's current market value sits in its cash - more on that shortly.

Beyond the guidance increase, here is a reminder on what I view to be the long-term bull case for Talkspace:

• Destigmatization of mental health. Buoyed by the pandemic, mental health and talking about our emotional issues are becoming heavily destigmatized. Younger generations no longer have the fear of going to see a therapist as older generations do. As these trends take hold, providers like Talkspace that have built up a vast network with an easy-to-use interface can take advantage of this tailwind.
• Broader coverage of mental health. More and more health plans are covering mental health services (often with limited or zero patient copay), broadening access and encouraging use of therapeutic services.
• Talkspace is focusing on the enterprise. Especially this year as the company cuts back on marketing cost, Talkspace is focusing its go-to-market efforts directly on large insurance plans and on employers to be more efficient about user acquisition.
• Psychiatry opportunity. The majority of Talkspace's services right now are centered around either self-help or therapy, but not psychiatry (medication management for mental health problems). The company views psychiatry as a massive growth opportunity for revenue going forward.

In spite of these strengths, Talkspace sits at incredibly low valuations, even after this year's run-up. At current share prices near $1.50, Talkspace trades at a market cap of just $261.4 million. After we net off the $125.3 million of cash on Talkspace's most recent balance sheet, the company's resulting enterprise value is just $136.1 million.

Meanwhile, for next fiscal year FY24, Wall Street consensus is expecting revenue of $166.7 million for the company, which represents relatively modest 14% y/y growth against the company's latest FY23 revenue outlook. This puts Talkspace's valuation at just 0.8x EV/FY24 revenue.

There are underlying risks here, of course. Talkspace's growth strategy aims to get more market share by partnering with employers and enterprises - who can cut out middlemen and partner directly with providers and provider networks. Other competing platforms like Betterhelp also exist.

That being said, the fact that Talkspace trades at just <1x forward revenue and has a path to adjusted EBITDA breakeven next year compensates for these risks. Stay long here and buy the dip.

Q3 download

Let's now go through Talkspace's latest Q3 results in greater detail, which were bizarrely poorly received in the markets (despite the dual tailwinds of having macro lifts from interest rate fears quelling, plus these strong results). The Q3 earnings summary is shown below:

Talkspace's revenue grew 32% y/y to $38.6 million, well ahead of Wall Street's expectations of $36.1 million (+23% y/y) by a huge nine-point margin. Revenue also accelerated considerably ahead of Q2's 19% y/y growth pace.

Management noted that revenue growth was driven by a number of factors, including an increase in the covered population, which led to much higher sessions of 228k in the quarter - up 14% sequentially and roughly doubling y/y. The company also benefited from price increases. Both of these factors were partially offset by a -32% y/y decline in the much smaller direct-to-consumer business (just over 20% of total revenue) as more users utilized insurance coverage benefits and fewer users paid out of pocket.

Per CFO Jennifer Fulk's remarks on the Q3 earnings call:

We also expanded session utilization by members on the platform, driven by product enhancements supporting both the provider as well as the member experience. Covered lives grew 31% year-over-year and 3% quarter-over-quarter to 113 million. As Jon noted, we anticipate adding approximately 15 million more covered lives in the next few weeks. Expanding our coverage further will help support momentum and volume growth as we go into next year.

Turning to net price growth of 5%, this was driven primarily by further improvement in our collections as our revenue cycle management team continue to find opportunities to drive higher collections rates. The Q3 results include a onetime benefit of $400,000 related to Q2 and prior period collections. We are very pleased with the strong execution of the team on this important and complex core capability."

Profitability was another major win for the quarter. As shown on the left side of the chart below, the company has succeeded at bringing down opex in each successive quarter:

Combined with strong top-line growth, this has allowed the company to achieve a record -7% adjusted EBITDA margin in Q3, substantially better than -53% in the year-ago Q3 and well on the way for Talkspace to achieve breakeven adjusted EBITDA in Q1.

Key takeaways

Talkspace's double-digit slide post-earnings creates a great buying opportunity in a small-cap stock trading at <1x revenue, despite excellent growth drivers, a healthy balance sheet, and a near-term path to adjusted profitability. Stay long here and wait for the rebound.

For further details see: