Teladoc Stock: A Fundamentally Mispriced Industry Leader
Summary
- Teladoc is trading at a market cap of just ~$20B (<10x P/S), a figure less than the price it paid for Livongo last October.
- In this note, I lay out Teladoc's vision and analyze its financials to determine fair value and expected returns.
- Due to asymmetric risk/reward on offer, I rate Teladoc a strong buy at $127.
- This idea was discussed in more depth with members of my private investing community, Beating the Market. Learn More »
Geber86/E+ via Getty Images
Investment Thesis
Teladoc Health (NYSE:TDOC) is a comprehensive, customer-centric virtual care provider that aims to deliver whole-person care with better outcomes at lower costs. A year on from its incredible acquisition of Livongo, Teladoc's market capitalization has dropped below the price it paid for Livongo. Now, looking at the price action, one might be inclined to believe that Teladoc is going bankrupt next quarter; however, this can't be far from reality. Teladoc's business is proliferating, and the company has a solid balance sheet. So, what's driving the drawdown here? Well, for starters, the market sentiment has turned bearish on tech stocks that benefited from COVID, e.g., Zoom (ZM), Roku (ROKU), Hims & Hers (HIMS), etc. As you may know, the telehealth industry saw a massive boost in adoption due to shutdowns caused by the COVID-19 pandemic. With the pandemic receding, life is returning to normalcy, and telehealth is no longer relevant.
Although this narrative is untrue, Teladoc's price action suggests so. Also, a lot of bearishness in Teladoc stems from new competition from giants such as Amazon (AMZN) and Walmart (WMT); however, I believe Teladoc has the capabilities to maintain its leadership position in the burgeoning telehealth industry, which is set to be worth $175B by 2026.
Source: CNBC (YouTube)
What capabilities, you ask?
| Crucial Characteristic | Notes |
| Visionary Founder/CEO | Jason Gorevic has served for 10+ years as CEO of Teladoc, proving himself to be a telehealth visionary, a great capital allocator, and an astute leader. |
| Proprietary Tech | Teladoc's AI/ML-powered platform is the foundation of whole-person virtual care. The telehealth leader is recalibrating the healthcare industry by pioneering preventative, data-driven healthcare. |
| Network Effects | The more users on the platform, the more data, better outcomes, lower cost. More doctors; more patients; more doctors; more patients. Powerful network effects and economies of scale. Teladoc is larger than all of its competitors combined. |
| Powerful Secular Growth Trend | The telehealth industry is growing rapidly even after the pandemic. Moreover, the rise of IoT, 5G, Cloud Computing, and Virtual Reality is set to enhance telehealth offerings over the coming years. Hence, the telehealth industry is likely to experience powerful secular growth for many more years to come. |
| Sounds Financials | Teladoc is growing sales at ~150% y/y (numbers boosted by the Livongo deal, core business growing at ~40%), and the recent quarterly net losses are a resultant effect of the Livongo acquisition (temporary impact). With secular tailwinds for telehealth, Teladoc is expected to continue growing at 30-40% for the next three years. |
| Branding | Teladoc is akin to Facebook: in just one word, it powerfully represents the company's business. |
| International Expansion | Teladoc already operates in over 130 countries. However, the company has a powerful runway for growth in international markets (especially with Livongo). |
Source: Author
The combination of Teladoc's data scale with Livongo's AI capabilities is enabling the telehealth giant to provide best-in-class products and services to all stakeholders (patients, doctors, insurers, and employers) across the healthcare industry. Eventually, Teladoc will transform into an AI-powered proactive virtual primary care partner that provides the right healthcare services to its members whenever and wherever required. Although Livongo's leadership team quickly left Teladoc after the merger was completed, the integration seems to be moving along just fine.
Here are some pillars of our investment thesis:
With the integration of Livongo, Teladoc has built a one-stop shop for insurers and employers to purchase comprehensive telehealth plans.
Virtual care is poised to move from reactive care towards AI-enabled proactive care. Livongo's AI capabilities, combined with Teladoc's data scale, create a powerful AI+AI (aggregate information + artificial intelligence) company that will drive better health and cost outcomes for, notably, consumers and insurers.
Teladoc now serves the entire spectrum of health after the addition of Livongo's unique longitudinal chronic care management offerings. A comprehensive telehealth platform will improve consumer experience and drive better health outcomes. Moreover, the data insights generated by the combined entity will help insurers and employers save on costs. Hence, the merger is a win-win for healthcare, and it will generate great value for shareholders in the long run. Therefore, the present malaise in the share price remains a compelling value proposition.
Over the next decade, Teladoc will retain its position as the leader in telehealth, a market that, as we've covered, is exploding and also quite intricate in terms of the number of very differentiated ways in which patients must be served.
Teladoc's stock has an intrinsic value of ~$350, i.e., it is significantly undervalued right now (current price: $127). The market is fundamentally mispricing Teladoc, and this is a great buying opportunity for long-term investors.
The telehealth market is set to grow at a ~30%+ CAGR over the next five years. Hence, the combination of two of the fastest-growing telehealth companies, Teladoc and Livongo, should yield a higher growth rate. Using a conservative growth rate of 27.5% CAGR, I deduced a 2031 price target of ~$1500, which translates to an expected CAGR return of +28%.
Since Teladoc is odds-on to outperform the market over the next decade, I rate it a strong buy at $127.
In this article, we will explore the future of healthcare, which will be much more telehealth-centric. In fact, Teladoc will likely be the largest beneficiary of the transformational shift towards virtual care environments. Let's begin.
Teladoc Is An Unstoppable Force
Teladoc's overarching goal is to transform the healthcare experience for consumers (preventive care to the most complex cases) via 'whole-person care' while simultaneously creating greater value for its clients and shareholders. Since its IPO in 2015, Teladoc has acquired multiple companies; however, the "Teladoc-Livongo" merger truly crystallized Teladoc's leadership position at the forefront of next-generation healthcare.
Source: Teladoc-Livongo Merger Presentation
The fear and uncertainty around so-called "COVID-plays" have left Teladoc trading at a market cap lower than what it paid for Livongo, which is outright crazy. Here's why I think so:
The Teladoc-Livongo merger brought two highly complementary (less than 25% overlap) companies together, creating an unmatched, comprehensive telehealth platform for next-gen virtual healthcare delivery. The coming together of the leaders in virtual health and chronic condition management combines comprehensive clinical expertise with a technologically advanced data-driven experience.
Truly a dynamic duo
With this incredible merger, Teladoc's offering expanded to the prevention and management of chronic conditions like diabetes and hypertension. Further, Livongo's data-driven approach strengthened Teladoc's mental health services. On the other hand, Livongo is benefitting from Teladoc's global footprint. Hence, the marriage of two of the fastest-growing health technology companies is a match made in heaven, and Mr. Market is acting like a drunken psycho here by relentlessly selling off Teladoc's stock.
Source: Teladoc-Livongo Merger Presentation
By combining Teladoc's clinical expertise with deeper, more comprehensive consumer health insights from Livongo, the combined entity is delivering a higher quality of care. In a nutshell, Teladoc is building a comprehensive virtual healthcare delivery system that utilizes data-driven insights to deliver actionable, personalized, and timely health signals to improve patient care. This comprehensive platform includes the full range of health support services: from AI+AI engine-driven "nudges" and health coaches to therapists, board-certified physicians, and the world's leading specialists, Teladoc will truly be the virtual primary care provider of the future. Furthermore, the platform is accessible anytime and anywhere to ensure the delivery of the right care at all times.
Together, Teladoc and Livongo are empowering millions of users to proactively manage their health needs through a single, comprehensive platform across the full spectrum of health, whether they are at risk of, or living with, chronic conditions or need acute care. Through Teladoc, consumers receive real-time information related to their health due to the omnipresent availability of data and care (which will be further facilitated by the proliferation of IoT healthcare devices, 5G, and cloud computing in the future). Additionally, consumers receive guidance proactively so that they can stay healthy and avoid the unchecked progression of any illness.
Source: Teladoc-Livongo Merger Presentation
The following video is lengthy; however, it is a must-watch for all Teladoc shareholders (and potential shareholders) because it explains the combined entity's shared vision. Let's hear Jason Gorevic (Teladoc's CEO) and Glen Tullman (Livongo's founder and Chairman) talk about the rationale behind this merger and its initial successes:
Source: Jason Gorevic, CEO, Teladoc Health & Glen Tullman, Founder & Executive Chairman, Livongo
Due to the complementary nature of Teladoc and Livongo, the merger of these two entities resulted in an expanded total addressable market opportunity. According to Teladoc's merger presentation, the combined entity has a total addressable market opportunity of $121 billion in the United States. With revenue expectations hovering around ~$2.3B for the next twelve-month period, Teladoc has a very long runway for growth.
Source: Teladoc-Livongo Merger Presentation
Teladoc's Long-Term Vision Sets It Apart
I understand that the telehealth industry is set to get more competitive with the entry of giant companies such as Amazon (AMZN) and Walmart (WMT). However, Teladoc is the most complete virtual healthcare platform today, and if Teladoc's management can execute on its long-term vision, I can see Teladoc maintaining its leadership position in the telehealth industry over the long run. Here's Teladoc's long-term vision:
- Teladoc is not competing with Amwell or Doctor On Demand or Zoom. Teladoc is creating its own category of holistic, data-driven virtual care. That's its focus. This includes integrations across a host of physical products, such as glucose monitors, blood pressure monitors, ultrasound devices, etc.
- Healthcare is not a one-dimensional product game. It requires specific products targeted at specific diseases/conditions. These are the bricks I referenced earlier. Teladoc's scale and breadth of offering will allow it to sell more for less to insurers/payers/hospitals/employers. Think Microsoft Teams bundle vs. Slack. Alongside Teladoc's data war chest and its focus on leveraging data to improve outcomes and reduce costs, this is a massive competitive advantage.
- Teladoc's offering is now so robust and innovative that insurance companies are evolving and adapting their insurance packages to the nature of Teladoc's technology/healthcare solutions. That is, insurance companies are leveraging Teladoc's expansive offering to reduce costs, and as was said on the company's most recent call, Teladoc and the insurance companies together will take part in the upside of this (financially benefit from the lower cost solutions and very broad adoption. Teladoc's product will achieve greater scale and thereby grow Teladoc's revenues, and the insurance companies will be able to sell insurance with higher margins. A win/win for both companies.)
In short, Teladoc is an AI company whose technology and offerings are defining a new segment of healthcare.
Analyzing Teladoc's Financials
Over the last couple of years, Teladoc's revenues have gone parabolic with a massive boost from the pandemic and the acquisition of Livongo. Although the integration of Livongo led to reduced operating margins in 2021, the impact seems to be waning with a solid recovery in operating margins seen over the last two quarters. Hence, it is only a matter of time before Teladoc returns to operating near breakeven.
Source: YCharts
Although Teladoc carries net debt of $420M, the company has enough cash balances to deal with near-term liabilities. Hence, the risk of bankruptcy is quite low (the price action in Teladoc's stock might suggest otherwise).
Source: YCharts
In Q2 2021, Teladoc registered positive cash flow from operations of $52M (a big swing into positive territory), indicating a sharp recovery from Q4 2020. As Teladoc completed the merger of Livongo in late-2020, its cash flows suffered massively due to unavoidable payouts; however, both CFO and FCF are back to the positive territory now. Hence, I do not foresee any financial troubles for Teladoc, and the company is unlikely to need to raise more capital in the near future (unless it wants to make acquisitions).
Source: YCharts
With Teladoc set to grow rapidly over the coming years (with room for margin expansion), I can see the business generating massive amounts of free cash flow over the next decade. Now, let's check out the long-term growth trajectory predicted by Wall Street analysts:
Source: Seeking Alpha
According to consensus analyst estimates on Seeking Alpha, Teladoc's annual revenue will rise to more than $10.5 billion by 2030. However, these numbers could prove to be too conservative. Here's why:
Teladoc and Livongo are highly complementary businesses with very little overlap. Hence, cross-selling should result in significant revenue synergies. The company disclosure mentions run-rate revenue synergies of $500 million by 2025; however, this figure could go much higher depending on the speed of product integration and adoption of Livongo's offering among Teladoc's massive client base and vice versa (cross-selling).
The powerful combination of Teladoc and Livongo will leverage data analytics and artificial intelligence to create better products and services for consumers, doctors, insurers, and employers.
These market-leading products and services will help Teladoc bring in larger revenues due to higher industry adoption. Moreover, they will likely garner higher margins for Teladoc.
Conservatively speaking, Teladoc will grow much faster than the telehealth market, which is expected to grow at ~30% CAGR for the next five years.
Source: gminsights.com
Thus, Teladoc could certainly achieve more than ~25% CAGR revenue growth over the next decade, which implies revenues in 2030 of closer to $20B than $10B.
Finding Teladoc's Fair Value
To estimate Teladoc's fair value and estimated returns, we will use the L.A. Stevens Valuation model. Here's what it entails:
In step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.
In step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).
In step 3, we normalize valuation for future growth prospects at the end of the ten years. Then, we arrive at a CAGR using today's share price and the projected share price at the end of 10 years. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.
Assumptions:
Forward 12-month revenue [A] | $2.3 billion |
Potential Free Cash Flow Margin [B] | 35% |
Average diluted shares outstanding [C] | 160 million |
Free cash flow per share [ D = (A * B) / C ] | $5.03 |
Free cash flow per share growth rate (conservative estimate) | 25% |
Terminal growth rate | 3% |
Years of elevated growth | 10 |
Total years to stimulate | 100 |
Discount Rate (Our "Next Best Alternative") | 9.8% |
Results:
Source: L.A. Stevens Valuation Model
As per these results, Teladoc's fair value is ~$356, i.e., it is undervalued by more than 64%. Well, one could even say that Teladoc is priced for a Black Friday Sale. Next, we will assess total expected returns.
Projecting Total Expected Return For Teladoc
To determine the expected returns, the model calculates a projected FCF per share value (yr-10) and multiplies it with an assumed Price to FCF multiple (35x here), thereby generating a 2031 price target. Using this price target, the model deduces an expected CAGR return.
Source: L.A. Stevens Valuation Model
Over the next decade, Teladoc's share price could grow from ~$127 to ~$1500 at a CAGR of ~28%. Since these returns are well above our investment hurdle rate of 15%, I rate Teladoc a strong buy at $127.
Concluding Thoughts
Teladoc is a fundamentally mispriced company due to widespread negativity around tech stocks perceived as "COVID" plays. Telehealth is here to stay, and Teladoc continues to lead this secular growth trend. With a strong leadership team at the helm, Teladoc continues to evolve healthcare brick-by-brick through its whole-person virtual care platform. Teladoc is the market leader, and the threat of competition from Amazon and Walmart does not alter Teladoc's future. The telehealth market opportunity is humongous, and Teladoc's stock will outperform the market even if the company manages to grow at the CAGR growth rate of the industry. Therefore, Teladoc is a table-pounding buy at $20B ($127 per share).
Key takeaway: I rate Teladoc a strong buy at $127.
Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.
At Beating The Market, we focus on making lives meaningfully better through investing. To join a rapidly growing community of like-minded, long-term growth investors --> Click Here
This article was written by
I am the Investing Group Leader at "The Quantamental Investor" - a community pursuing financial freedom via bold, active investing with proactive risk management. At TQI, we help retail investors build and preserve generational wealth in public markets. To do so, we share highly concentrated, risk-optimized model portfolios that meet investor needs across different stages of the investor lifecycle. In addition to deep fundamental research, all of our investment ideas are thoroughly vetted using a mix of quantitative, technical, and valuation analysis. Furthermore, a TQI membership includes access to our proprietary software tools and group chats. If you're interested in learning more about our community, visit: The Quantamental Investor
In addition to my investing experience of 10+ years, I have a professional background in equity research, private equity, and software engineering. Prior to joining The Quantamental Investment Group LLC, I served as the Head of Equity Research at a growth-focused SA Investing Group. In the past, I have worked as an Associate Fellow with Jacmel Growth Partners, a middle-market private equity firm in New York. And my resume also includes a stint at Capgemini as a software engineer. With regards to academia, I hold a Master of Quantitative Finance degree from Rutgers Business School and a Bachelor of Technology degree in Electronics and Communication Engineering, whilst I am also pursuing the CFA certification (Level 2 candidate).
If you're interested in reviewing my performance, feel free to view this tracker: Performance tracker for TQI's SA Premium (public) research.
If you would like to connect with me, please feel free to send me a direct message on SA or leave a comment on one of my articles!
To learn more about our company and services, visit: The Quantamental Investment Group LLC's website - TQIG | Home
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TDOC either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (40)
But I decided that was one of my (few) mistakes, and I sold ~150 with a small loss, because of: lack of moat; strong competitors; bleeding cash flow from operations; debt (and the negatives only growing stronger)
The only interesting thing I see is indeed the valuation, but no way the numbers in this article (25% growing FCF for 10 years "conservative estimate"!!)... I believe Morningstar's FV = 210 much more appropriate...however, I decided to take some time to research and switched to some other things much more robust / interesting
Good luck anyway!
It will drop before it comes back
