Amazon’s health platform could send a lot of business to Talkspace.
Talkspace (TALK 2.94%), the provider of virtual behavioral-health services, just made a move that builds on the bull thesis for the stock. Thanks to a new collaboration with Amazon, there’s a good chance that it will be able to grow its revenue significantly faster than before.
But Talkspace isn’t exactly a low-risk pick, nor is its success inevitable. Let’s break down the importance of its Amazon deal and analyze what the business is still struggling with to see if it might be a smart purchase.
This new collaboration is a point in the stock’s favor
Talkspace’s behavioral health services are meant for easy access from a smartphone or computer. Many people can get therapy from the company for as little as $15 per session, provided that it’s covered under their health insurance.
But since online therapy providers are relatively new themselves, a lot of people probably aren’t sure whether their insurance would even cover a visit. And that hampers the company’s ability to grow.
That’s where the deal with Amazon comes in. Talkspace announced on Sept. 17 that when consumers are looking through Amazon Health Services’ offerings for mental-health services, they will be able to easily check whether their insurance covers Talkspace. So its services will be promoted to more people, who will be able to quickly determine whether they could use them cheaply. The company’s growth should pick up as a result.
In the second quarter, revenue rose by 29% year over year, reaching $46.1 million, generated in large part by 299,000 care sessions that were covered by insurance. So the new deal with Amazon is likely to drive at least some gain in the stock price, since management is making headway in expanding its provider network and raising consumer awareness.
With Amazon’s access to hundreds of millions of consumers, the benefits for Talkspace shareholders could be quite substantial over the next few years. And that’s a big new reason to buy the stock.
There’s still some downside risk
The metric that will show if this agreement is a success is the number of Talkspace care sessions. But an even more important metric will signal a reason to avoid this stock.
Providing talk therapy and other behavioral health services is expensive, whether virtually or in an office. Talkspace isn’t yet profitable, with operating losses of $12.9 million in its second quarter. As revenue has risen over the last year, its quarterly gross margin has actually fallen from 50% to $45.5% even as its gross profits have risen.
Adding new patients with Amazon’s help could drive Talkspace’s gross margin even lower, which is why some investors might want to avoid this stock. Also, it’s unclear whether it has any competitive advantage. So it might not reward those who buy for the long term despite the near-term promise of top-line growth. The company’s hasn’t yet proved that its business model is viable over the long term.
On the other hand, there are also good reasons to remain optimistic.
Talkspace has $123.9 million in cash and cash equivalents, so it isn’t in any danger of running out of money. Furthermore, for the last four quarters, its operating expenses fell as a proportion of its quarterly revenue. More progress on that front is likely, especially if it can realize economies of scale in providing mental health care. Reporting earnings could be just a few quarters away at this point, assuming that the company realizes its plans.
Overall, the forecast is mostly sunny for Talkspace and its shareholders at the moment, even if profitability is a concern. If you’re looking for a sign to make a small investment, now is a decent time to buy.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.