I am neutral on Teladoc (TDOC) as its poor recent performance and lack of pricing power offset its attractive stock price and strong support from analysts.
Teladoc is a leading global telehealth company. It provides virtual healthcare services, commonly referred to as “telemedicine.” It operates under three brands: Teladoc, Livongo, and BetterHelp. It is based in Purchase, New York, but has a global presence.
In this article, I will lay out three reasons why I am neutral on TDOC stock at current prices.
Shockingly Weak Q1 Results
Fiscal Q1 results for TDOC were appallingly weak, with adjusted EBITDA declining 4% year-over-year. On top of that, the company incurred a massive $6.6 billion ($41.11 per share) goodwill impairment charge, reflecting overpaying for acquisitions in the past.
For a company that is still running up steep per share losses and – prior to the quarterly report – traded at a hefty multiple of EBITDA, such results are utterly unacceptable for investors.
As a result, it is unsurprising that the stock plummeted in the wake of the release of the results. The poor results also prompted management to reduce guidance for the year. The lone bright spot from the quarter was that revenue grew 25% year-over-year, reflecting that the company continues to capture new business, albeit not yet on a profitable basis.
Access fee revenue increased 29% year-over-year, and visit fee revenue grew 12% year-over-year. U.S. revenue grew 24%, while international revenue – thus far a much smaller portion of the business – grew 27% year-over-year.
If management can accelerate the growth of its international business, it could add a lot of perceived value to the business as it has massive international growth potential.
Lack of Barriers to Entry
TDOC possesses some competitive advantages. These include economies of scale, impressive network effects via its large subscriber and provider networks, and an immense treasure trove of healthcare patient and consumer data that it is using to advance artificial intelligence and data analytics healthcare applications. However, it ultimately lacks the barrier-to-entry competitive advantage, which is essential in this space.
Virtually any company can build an app similar to theirs, and any mega-cap company – such as Amazon or Apple or even some of the large health insurers – would immediately have the organic scale necessary to potentially implement their own solution and potentially market it to others.
While TDOC will still very likely remain a competitive and leading player in the space for years to come simply due to the strengths inherent in its existing platform, it will be very difficult for it to enjoy any pricing power, and sustaining its growth rate over the long-term could prove quite challenging. As a result, the issue of profitability remains a major challenge for them.
Attractive Stock Price
TDOC’s recent results and lack of pricing power make it look like a highly risky investment. The good news is that the stock price currently looks quite inexpensive.
For example, its forward EV/EBITDA multiple is only 22.7x, and its forward price-to-free-cash-flow ratio is only 23.9x. Also, its forward price-to-sales ratio is a meager 2.1x. The company’s historical average ratios for each of those metrics are 71.4x, 143.4x, and 8.9x, respectively, so the upside potential is enormous if TDOC can regain its former appeal to the market.
The company also continues to have strong support from most analysts. The consensus free cash flow CAGR through 2026 is a whopping 40.5%, while the consensus EBITDA CAGR is 25.6%, and the consensus revenue CAGR is 21.0% through 2026. If it can deliver numbers even close to those estimates, it should generate enormous shareholder returns given its current multiples.
Wall Street’s Take
On top of that, Wall Street analysts give TDOC a Moderate Buy consensus rating based on eight Buys, 18 Holds, and zero Sell ratings in the past three months. Additionally, the average Teladoc price target of $54.94 puts the upside potential at 70.6%.
Summary and Conclusions
TDOC is a leading global telemedicine company with impressive economies of scale, strong revenue growth momentum, and a leading collection of healthcare patient data thanks to servicing roughly 16% of the U.S. population as paid members.
That said, the company recently had to record a massive impairment and saw EBITDA actually decline year-over-year in its most recent quarter. The company is making costly investments that it needs to find a way to generate stronger profitability from despite lacking pricing power or barriers to entry over competitors.
On the whole, the stock looks extremely cheap here if it can deliver on analyst expectations, but its ability to become a truly profitable company remains in doubt given its lack of pricing power and the growing competition in the space.
As a result, investors might want to wait for an additional margin of safety or for the company to show a strong indication of being able to scale into profitability in the near future before adding shares.
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