Teladoc: It Deserves To Be Hammered

Apr. 25, 2022 5:22 AM ETTeladoc Health, Inc. (TDOC)60 Comments7 Likes

Summary

  • Teladoc Health remains unprofitable despite claiming to be the market leader.
  • TDOC stock has lost 80% from its pandemic highs, as we think it deserves to be clobbered.
  • Teladoc stock still looks expensive, with NTM FCF yields at just 0.77%.
  • We discuss why we revised our rating on TDOC stock from Buy to Hold as we head into its Q1 earnings.
  • I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Young woman talking to her doctor on a video call

Geber86/E+ via Getty Images

Investment Thesis

Teladoc Health, Inc. (NYSE:TDOC) stock has continued to see its stock decline even though it has suffered tremendous value compression. The Street's price targets (PT) had also been revised downwards with remarkable consistency over the past year, as the analysts also couldn't get it right. We also thought TDOC stock looked cheap on previous occasions, but the stock continued to fall.

But, as we got around to what mattered for TDOC stock, we realized the market had gotten it right. Teladoc stock deserves the battering as it was significantly overvalued. It still is, given its estimated growth rates moving forward.

As we head into Teladoc's Q1 earnings on April 27, we are convinced we have gotten our Buy rating wrong on TDOC stock over the past year. Therefore, we have decided to revise our rating from Buy to Hold.

TDOC Stock Was Never Cheap

TDOC stock NTM FCF yields

TDOC stock NTM FCF yields % (TIKR)

TDOC stock consensus price targets Vs. stock performance

TDOC stock consensus price targets Vs. stock performance (TIKR)

It's easy to understand why bullish TDOC analysts and investors have gotten its valuation so wrong. TDOC stock has declined a spectacular 80% since its highs in February 2021. But, 11 Street analysts remained bullish, down from 15 in June 2021. However, even their most conservative PTs have proved to be significantly off-target as TDOC stock collapsed over the past year. So why did the Street and ourselves have gotten it so wrong?

Because TDOC is still unprofitable, despite its leadership position and massive pandemic growth. So, as the pandemic premium wore off, investors refocused on Teladoc's bottom line. Then, it became clear that TDOC stock was grossly overvalued.

Teladoc stock's NTM normalized P/E is still in the red, at -38.9x. At the peak of its 2021 bubble, its multiple reached -418x. Some analysts suggested that Teladoc is FCF profitable. But, despite its massive decline, it last traded at a 0.77% NTM FCF yield. So, we think there's still a fair amount of price discovery as the market attempts to price TDOC stock.

Therefore, its business model is unprofitable, coupled with weak FCF yields. Despite the massive drop, we think it still seems expensive.

Teladoc Claims Market Leadership. Yet, It's Still Unprofitable

Teladoc consensus estimates

Teladoc consensus estimates % (S&P Capital IQ)

Readers can refer to the chart above and observe that Teladoc is not expected to report positive net margins even on adjusted terms in the next two FYs. Notably, the company has been unprofitable through the "bubble" years of FY20-21. But investors were willing to tolerate its lack of profitability given the speculative bubble driven by easy monetary policy. Furthermore, we think investors bought into the "story" that perhaps Teladoc's growth was more durable than what they thought was possible.

However, the bursting of the pandemic bubble proved that despite its massive growth and leadership, Teladoc was unable to turn profitable. Adding the macro headwinds from surging inflation and accelerated rate hikes moving forward, it could also potentially impact Teladoc's profitability further. Citi (C) Investment Research highlighted (edited):

Teladoc could be highly exposed to the risk of a recession. It's exposed to the commercial market, which will likely have the biggest impact. This is attributed to unemployment which can lead to outsized membership losses.

Revenue Guidance Moving Forward Is Key

While it's arguable whether the risks of a recession have been largely priced in, Teladoc's commercial-heavy business model could be susceptible. For example, its access fees accounted for 82.8% (US: 59.2%) of its FQ4 revenue. Therefore, Teladoc could be impacted more significantly. Notably, Teladoc also accentuated such risks in its 10-K, as it cautioned investors. It added (edited):

A significant downturn in economic activity may cause organizations to reduce their spending on healthcare matters. In addition, our Clients may delay or cancel healthcare projects or seek to lower their costs by renegotiating vendor contracts. To the extent purchases of our solutions are perceived by Clients and potential Clients to be discretionary, our revenue may be disproportionately affected by delays or reductions in general healthcare spending. (Teladoc's FY21 10-K)

However, Teladoc CFO Mala Murthy accentuated in a March conference that the company's revenue guidance for FY22 had "high visibility." She articulated (edited):

The revenue guidance that we have provided is in the 25% to 30% range. What's important is, when it comes to revenue, everything that we are talking about is under contract. So when I say we have high visibility, it is because of that. It's already contracted. (42nd Annual Cowen Health Care Conference)

However, if a recessionary scenario impacted Teladoc, we believe it could feel the effects beyond FY22. As a result, it could affect the company's topline growth and, consequently, its path to profitability. We believe the market is trying to price for such risks to its commercial-weighted business model. Furthermore, we also think that the progress in its DTC segment is insufficient to offset the potential losses from its commercial segment.

Is TDOC Stock A Buy, Sell, Or Hold?

We revise TDOC stock from a Buy to Hold. We concur with the skeptics that our view on TDOC stock was incorrect. Teladoc should have been reporting sustainable profitability, even as it scales, given its leadership position. Furthermore, its stock is still expensive, despite being FCF profitable. We implore investors to stick with profitable growth stocks in a challenging macro environment.

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This article was written by

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I'm Jere Wang, the lead writer and founder of JR Research and Ultimate Growth Investing Marketplace service. Our team is committed to bringing more clarity to investors in their investment decisions.

Our marketplace service focuses on a price-action-based approach to growth and technology stocks, supported by fundamental analysis. In addition, our general SA site discusses stocks from various sectors and industries. 

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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