It’s a scary time to be a growth investor. With the Federal Reserve aggressively hiking interest rates and the stock market in a steady decline, it’s entirely rational to wonder whether it’s a good idea to keep buying shares of growth-phase businesses.
And (spoiler alert) for some people, it might not be. Much depends on your risk tolerance and investment time frame. Let’s examine Teladoc Health (TDOC 4.94%) as an example to explore which category of investor you might fall into during the ongoing disruption in the market and the economy.
The pro case: Why it makes sense to keep buying shares
Like many other growth stocks, Teladoc is down more than 88% over the last 12 months. This brutal decline might seem like the kind of result you’d expect from a company with shrinking revenue or severe and enduring headwinds, but neither is the case. Its quarterly revenue rose by around 25% over the last four quarters, and over the last three years, its quarterly sales increased by 334%.
But while growth has somewhat slowed compared to prior years, it’s hardly a foregone conclusion that it will slow further or start contracting. Teladoc is expanding its telehealth offerings to include chronic care management and mental healthcare, both of which are anticipated to be lucrative areas as more wellness services offer telemedicine. And there’s no single telehealth provider that’s as big or as well-known, another advantage that might become more relevant over time.
Let’s say that you’re a relatively young investor with a high tolerance for risk and a need for aggressive stocks to deliver big growth in your portfolio. The fact that Teladoc’s shares have been eating dirt recently shouldn’t really influence your decision as the decline isn’t associated with any detrimental changes to its competitive advantage in the market. The stock’s poor performance is also not the result of consumers eschewing telehealth as a category of services.
Though it’s true that the Federal Reserve’s policy of hiking interest rates will make it a bit more expensive for Teladoc to borrow money moving forward, the same is true for most growth stocks that might need to take out a loan. And as much as inflation and supply chain issues might be striking the economy, Teladoc’s most critical inputs are skilled labor from its telemedicine physicians, who don’t need specific supplies to continue to add value, and whose services are already on the expensive side.
In other words, the stock market’s present headwinds aren’t going to stop Teladoc from continuing to do what it’s best at in the long run. So if you’re willing to accept a bit of turbulence in the short term, the main investing thesis for Teladoc is still sound, and you should keep buying shares.
Furthermore, there’s a very high chance that quite a few other growth stocks that are currently in the dumpster still have a similar combination of financial health and enduring competitive ability. If the company’s prospects haven’t significantly dimmed, the recent downward price movements might just be noise or fallout from the wider market — not a reason to avoid investing.
The con case: Why it might be better to wait or invest in something safer
Buying shares of a formerly high-flying growth stock like Teladoc is easy to do if you know you won’t need the money anytime soon, or possibly ever. On the other hand, if you’re an investor who needs to skew more conservatively because of a looming financial goal like retirement or financial independence, the picture is a bit different.
While unlikely, it’s entirely possible that Teladoc’s shares will drop by another 88% over the next couple of years, even if its competitive abilities only become stronger. And an investment in a beaten-down growth stock that might take five or six years to recover simply won’t do if you need the money before then.
Additionally, rapidly expanding businesses in new industries like telehealth will frequently face competition from new entrants to the market, who may ultimately eat their lunch. For a company like Teladoc that’s presently unprofitable, the arrival of new competitors could make the march toward profits even longer and more difficult. The same might be true of other hot sectors.
Finally, if your portfolio needs less exposure to risk for any other reason, it’s probably not a smart idea to invest in Teladoc or other highly hyped growth stocks. Even if the long-term future of the company and the market both look bright, by most accounts we’re in for a bit more turbulence before things settle down.