Is This Top Canadian Small Cap Stock a Screaming Buy?

WRITTEN BY Dylan Callaghan | UPDATED ON: September 24, 2021

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The summer doldrums haven’t been kind to Canadian stocks in the telehealth sector. While the TSX Index continues to make new highs, the telehealth industry is stuck in a rough patch. Several of these once white-hot stocks are sitting on negative returns year to date and investors have had to be patient.

One of those stocks is Cloud MD (TSXV:DOV).

Cloud MD (TSXV:DOV) and the telehealth IPOs

Trading on the TSX Venture, this small cap was going head-to-head with WELL Health Technologies (TSE:WELL) as one of the hottest stocks in the industry in mid-2020. The company's success led to the subsequent IPOs of many telehealth stocks such as Carebook (TSXV:CBRK), MindBeacon (TSE:MBCN), MCI Onehealth (TSE:DRDR), and Dialogue Health (TSE:CARE).

Worth noting, all of those IPOs are sitting on double-digit losses from both their IPO and list prices. This is what happens when FOMO takes center stage and IPOs list at peak euphoria. An important collection of events to be considered by those learning how to buy stocks, as many get sucked into hype and sometimes end up in a challenging situation. Although not a recent IPO, another company to take a huge hit late into the pandemic was NFI Group (TSE:NFI).

In CloudMD’s case, the company is sitting on losses of ~30% year to date.

It briefly ran to even on the year in early July, but once gain the stock has been mired in a multi-week downtrend.

Should you be holding, buying, or selling CloudMD (TSXV:DOC) stock?

While it can be difficult to hold in such an environment, investors must not lose sight of the long-term future. A future which looks quite bright for one of the fastest growing companies in the industry.

One of the biggest criticisms against the company was the fact that it was issuing a significant amount of shares to fund growth. While this isn’t necessarily a bad thing, competitors such as WELL Health were more adept at using a combination of cash + equity to fund growth.

The good news is that CloudMD management acknowledged this but also indicated that moving forward, acquisitions will be less dilutive. As the company integrates the myriad of acquisitions from the past year, it is become more efficient, generating more cash flows and is closer to break-even EBITDA.

It’ll be up to management to make good on that promise, but the company’s last major acquisition, the $100M deal to acquire Oncidium, was a good step. Terms included $30M in cash and $38M in shares (@$2.30 per share), plus performance-based payouts of up to $32M over a three-year period.

The key with the earnout, is that it can be made in cash, shares or a combination of both and is at the sole discretion of management. That means that up to 62% of this acquisition could be paid in cash – a far more take-over friendly structure for current CloudMD shareholders as it is less dilutive.

Valuations are making CloudMD stock more attractive

Thanks to the company’s recent downtrend, it is now trading at cheap valuations. CloudMD continues to post record revenue QoQ and now has a forward annualized run rate exceeding $140 million. That gives the company a P/S ratio of only 2.77 base on this run rate.

Of note, that includes no organic growth and analysts are expecting the company to reach $191M in revenue by 2023. That gives it a forward P/S ratio of approximately 2, which is the cheapest it has been and among the cheapest in the industry.

Paying that price for a company that is expected to average 50% annual growth over the next few years is more than reasonable. In fact, it looks quite attractive here.

There is no question small caps are out of favour in the current market. However, with a little patience, interest will return and investors holding onto companies with strong fundamentals and growth prospects are likely to be rewarded.