1 big new reason to buy Talkspace stock and 1 reason to avoid it

Discussion space (SPEAK 2.49%)provider of virtual behavioral health services, just made a move that is based on the bull thesis for stocks. Thanks to a new collaboration with Amazonthere is a good chance that he can increase his income much faster than before.

But Talkspace isn’t exactly a low-risk choice, nor is its success inevitable. Let’s break down the importance of its deal with Amazon and look at what the business still struggles with to see if it could be a smart buy.

This new collaboration is a point in the stock’s favor

Talkspace’s behavioral health services are designed for easy access from a smartphone or computer. Many people can get therapy from the company for as little as $15 per session, as long as it’s covered by their health insurance.

But since online therapy providers are relatively new themselves, many people are probably unsure if their insurance would even cover one visit. And that hinders the company’s ability to grow.

This is where the deal with Amazon comes in. Talkspace announced on September 17 that when consumers search Amazon Health Services’ offerings for mental health services, they will be able to easily check if their insurance covers Talkspace. So his services will be promoted to more people who will be able to quickly determine if they could use them cheaply. As a result, the company’s growth should accelerate.

In the second quarter, revenue rose 29% year-over-year to $46.1 million, driven largely by 299,000 care sessions that were covered by insurance. So the new deal with Amazon will at least generate a share price gain as management makes progress in expanding its supplier network and increasing 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 new reason to buy the stock.

There is another downside risk

The metric that will show whether this arrangement is successful is the number of Talkspace care sessions. But an even more important measure will signal a reason to avoid this stock.

Providing speech therapy and other behavioral health services is expensive, either virtually or in an office setting. Talkspace is still not profitable, with an operating loss of $12.9 million in the second quarter. As revenue grew over the past year, its quarterly gross margin actually fell from 50% to 45.5%, even as its gross profits rose.

Adding new patients with the help of Amazon could reduce Talkspace’s gross margin, and so some investors may want to avoid this stock. It is also unclear whether it has any competitive advantage. So, it may not reward long-term buyers despite the short-term promise of top-line growth. The company has yet to demonstrate that its business model is viable in 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’s not in danger of running out of money. Additionally, over the past four quarters, its operating expenses have declined as a proportion of its quarterly revenue. More progress is likely on this front, especially if it can achieve economies of scale in the provision of mental health care. Earnings reporting could be just a few quarters away at this point, assuming the company follows through on its plans.

Overall, the outlook is mostly sunny for Talkspace and its shareholders right now, 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.