The bull thesis on Talkspace Inc. (TALK) is very easy to digest:
Let’s dig in.
Yes, Talkspace came public via a SPAC, at roughly a 10x Price-to-Sales valuation:
“The deal values Talkspace—which connects users with licensed therapists via video chat or text—at $1.4 billion, including debt.
The deal will provide the company with $250 million in cash to be used as growth capital, the companies announced Wednesday.”
Like most other SPACS, TALK spent the better part of 2021 and 2022 steeped in a horrible downtrend, before finally basing out in the first half of 2023, when smart investors began to see a light at the end of the tunnel:
Just over a year ago, things were still looking bleak for Talkspace. The company was burning serious cash and there was no roadmap to turning EBITDA positive.
Here is how the business looked back then:
Enter new management, specifically, a seasoned med-tech veteran from Quest, Dr. Jon Cohen, who has executed flawlessly since taking the reins as CEO in November 2022:
Cohen brings more than 30 years of healthcare experience as a seasoned executive with a successful track record of driving strategic transformations and implementing operational discipline while developing a number of new business ventures. Cohen has specific experience developing and scaling digital health and mobile health technology initiatives.
As Executive Chairman and CEO of BioReference Laboratories, one of the nation’s four largest commercial laboratories, he built and scaled Scarlet Health, the nation’s largest digital at home blood draw solution utilized by major telehealth platforms, which is now a covered service for over 83 million people.
Cohen has also developed successful commercial relationships with a number of large national health systems and payors while part of the executive leadership team at Quest Diagnostic and BioReference.
Since Cohen became CEO, the stock has tripled. Yes, very quietly, Jon Cohen has proven to be a jockey to bet on. He is a big reason for our bullishness, as it is so rare to find a leader whose impact has been so indelible, so quickly.
While the shift may seem logical now, back then, re-directing Talkspace from a B2C company to a B2B-focused company was a stark change in strategy as the world was normalizing post-Covid. But, boy, the proof is in the pudding.
In Q1 2023, in his first full quarter as CEO, the company’s large insurance vertical began to inflect:
Concomitant to the cost-line ratcheting lower dramatically, suddenly, the EBITDA line began moving strongly in the right direction too:
By Q2, continued progress, with another spike sequentially in the large insurer business and the EBITDA loss declining 30% sequentially from Q1 to Q2:
By Q3, B2B Payor Sessions were up 100% YoY:
By stacking new providers at an accelerated rate and providing mental health telehealth services for the likes of Optum, UnitedHealthcare, Cigna, and Aetna, very subtly, Talkspace has ensconced itself as THE LARGEST in-network provider for mental-healthcare in the US.
Note that while its B2C business has been declining YoY - this part of the business was only 22% of the overall revenue mix in Q3 – its main growth engine, the rocketing B2B business, will now become readily apparent as we move throughout 2024. A big year lies ahead:
Under the hood, the top-line acceleration is even more impressive in TALK’s main growth driver, its large insurance plan business, known as B2B Payor, which was up nearly 100% YoY:
Better yet, there is another catalyst forthcoming - its DTE business. This segment is focused on helping teenagers battle mental-health struggles via direct outreach programs launched with various school systems around the country. The DTE business is poised to re-accelerate the next few quarters.
TALK just announced marquee wins with both the NYC and Baltimore school systems.
Others should soon follow, cementing the company’s role as the leading mental-health telehealth platform, not solely for large insurers, but also for schools and universities around the country.
While the TAM in this vertical is only $500M, assuming Talkspace garners 20% market share the next 3 years, this part of the business should grow strongly beginning in the first half of 2024. This growth will add a new lever which should help usher in substantial upside to its top-line numbers this year, relative to consensus.
Moreover, with 13M additional covered lives coming onboard over the next few quarters, along with increased utilization and additional market-share gains, for us, there is clear dispersion between forward estimates and the revenues TALK will actually print.
To wit:
Note the highlighted green area below. The past two quarters revenues have grown sequentially 800 bps and then 1300 bps. Its main growth driver, its burgeoning large insurance vertical is growing 110% YoY and yet consensus numbers for Q4 have the YoY growth rate decelerating by 300 bps. Same for Q1 as well. This makes no sense to us:
This sets the stage for a series of beats as we move into and through 2024.
For 2024, our model has revenues growing 38% to $206M. This compares very favorably to current consensus:
Notably, EBITDA leverage will flip positive in Q1, creating a strong catalyst for a multitude of growth-oriented funds to buy into the name, finally.
The timing could not be better, as there are literally NO institutional owners left in the stock. Take a look:
Looking further out to 2025, while revenue growth will slow down, we expect Talkspace to do a tuck-in acquisition in the next few quarters. This should catalyze another year of 30% top-line growth in 2025 to $270M, which again represents significant upside to current consensus.
Remember, the best Small-Cap Inflections occur when there are not just a series of Beat n Raises occurring, but also where there is a profitability/cash-flow inflection to boot. This makes Talkspace a unique micro-cap asset to own this year. It has scarcity value, as it will be one of the ONLY micro-caps that will be generating cash AND poised to grow its top-line 35%+ organically.
We do not expect Cohen to rest on his laurels. In a recent interview, Cohen stated:
“A year ago when I first got here, people said, ‘When will you run out of cash?’ Now they’re saying, ‘What are you going to do with $120 million?’ The story has changed.”
Tuck in anyone?
At $240M, TALK trades for a $401M market cap.
Subtract the $120M in cash expected on its balance sheet at the end of Q1, pencil in our 2025 revenue projections of $266M and these optics show the stock is still quite attractive, trading for only ~1.1x forward numbers.
Add in a non-existent shareholder-base, poised to materially increase, and there is a potent mix for strong upside over the next few quarters as this double-barreled Top-Line and EBITDA Inflection manifests.
Unfortunately, this is not a business that will scale immensely on the margin line. Gross margins will not expand much from current leverage and it remains to be seen how much inherent leverage there will be on the EBITDA line.
Talkspace also operates in a competitive industry. What if others gain market share, similar to what Talkspace has done the past four quarters?
Will the CEO Cohen make a mistake, or two? It’s hard to imagine his perfect track record continuing unabated forever.
Having noted such risks, we do not think they are going to deter our bull thesis from playing out over the next 2 quarters, after which time we expect the stock to be much higher from current levels.
Remember, Talkspace has tremendous consumer brand-awareness, smartly continuing its partnerships with the likes of celebrity-swimmer, Michael Phelps.
Moreover, its technology platform, which allows therapists to specify which set of consumers they want to help with their mental-health struggles, has seen a huge J-curve. These therapists, just coming onto the platform, create a positive feedback-loop for additional market-share gains for Talkspace as we move through 2024.
Patients also love the platform. Talkspace’s unique ability to match patients with a therapist within just a few days is a key differentiating factor for them.
Finally, there is the AI angle, which has been a key factor to the company’s recent market-share gains. Since partnering with NYU’s Grossman School of Medicine in 2019, Talkspace has been utilizing AI to identify language patterns in patients' messages which are consistent with high-risk behaviors or individuals at a higher risk for self-harm. The system has been proven to be 83% accurate, flagging 32,000 such members in the past few years. Over 50% of these patients have demonstrated improved outcomes since then.
In summary, there is a lot to like here.
We therefore remain steady buyers at current levels and plan to add further in the coming days and weeks, particularly on any pullbacks to the low-$2s.
With minimal downside and strong upside relative to current consensus, TALK offers a rare asymmetric investment opportunity. Should shares re-rate to a 1.9x forward Price-to-Sales multiple, this would translate to 70% upside from current levels.
Should the company show further traction than expected, along with enhanced bottom line leverage, long-term upside could eventually be measured at much higher levels than the low-$4s. But let’s cross one bridge at a time and not get too far ahead of our skis.
In conclusion, Talkspace is a rare breed: a Top Tier Micro-Cap Inflection poised to reveal itself during 2024.
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Disclosure: We are long TALK. As is the case with all of our inflection point plays, should expectations not manifest as we expect, we plan to stop out of the stock on any break below its 200-day SMA, as any such move would indicate that our bullish thesis has not played out and we have been wrong in one way or another.
Disclaimer: In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in TALK at a moment’s notice without updating you on any such change in opinion and positioning.
Investors need to consider their investment risk tolerance before investing in the stock market and also before investing in any of the stocks mentioned in this report.
