Teladoc: Pump The Brakes

| About: Teladoc (TDOC)

Summary

Teladoc rallies following the acquisition of Advance Medical to expand globally.

The stock gains this year are mostly due to multiple expansion that aren't sustainable.

The company needs to improve EBITDA metrics before a rally beyond $60 occurs.

As Teladoc (TDOC) completes another merger that will lead to global expansion, the market enthusiasm for the stock has grown immensely. The stock that was a bargain on a dip to $30 on the big merger last year isn't a bargain this time following the purchase of Advance Medical. At nearly $60, Teladoc trades in a completely different situation now, having rallied following the recent deal suggesting investors do the opposite as well.

Image Source: Teladoc/Advance Medical merger presentation

Global Expansion

Last week, Teladoc announced the purchase of Advance Medical and the stock hasn't stopped rallying. Remember though, the acquired company only had revenues of $63 million in 2017 that grew at a meager 15% growth rate. Telco bought a hot sector, but a not so hot business.

Teladoc paid approximately $352 million for Advance Medical. The deal includes a cash payment of $292 million and $60 million in stock or roughly 1.34 million shares with the deal closing on May 31.

The virtual care provider got a reasonable deal for roughly $73 million in forecasted 2018 revenues. The deal value is roughly 5x sales estimates for 2018.

The opportunity for global expansion and scale is the clear reason for the deal. Advance Medical offers the complex care and episodic care offerings globally that Teladoc previously didn't.

As the virtual health provider highlights, the global health insurance market is worth in the trillions and expected to double in the next decade. This market growth will play out over time, but the really easy addressable market is in the US multinational employment outside the US. The new company can now provide a more complete virtual health solution for corporations with over 14 million employees outside the US on top of the 28 million in the US.

Source: Teladoc/Advance Medical merger presentation

Multiple Expansion

While the deal has huge potential for global expansion and leadership in virtual health, the stock will eventually come back to reality. The new company will have roughly $428 million in annual revenue this year and big questions on why Advance Medical is only growing at 15% in a wide open market.

With a diluted share count of around 70 million (6 million additional shares from convertible debt offering and the 1.3 million for the merger), the stock is now worth about $4 billion. A key metric to check the updated value of Teladoc is the forward PS ratio.

The stock has gone from a bargain at below 5x forward sales to now around 7x updated 2019 sales estimates. All of the gains in the last year are mostly due to multiple expansion.

Chart

TDOC data by YCharts

The biggest issue is going to be the weak financials of Advance Medical and the costs of running a global operation at scale before having revenues at scale. Advance Medical only generated about $2 million in adjusted EBITDA last year and 15% growth isn't going to provide a lot of boost to the bottom line in the short term.

Teladoc had adjusted EBITDA of negative $12.5 million last year so even positive EBITDA from Advance Medical makes the deal accretive. The company though likely needs to invest to reach scale, so what appears accretive isn't really meaningful to an already weak bottom line.

The big issue is that revenues will approach $600 million in 2019 and the market will quickly turn sour on a stock where meaningful EBITDA isn't achieved.

Takeaway

The key investor takeaway is that Teladoc completed an appealing merger to create a global virtual health powerhouse. The stock rally on top of the gains from the start of the year that has seen Teladoc nearly double makes for a time to pause.

The stock likely hits $60, but investors will quickly demand some better financials before rewarding Teladoc with a higher valuation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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