Teladoc (NYSE:TDOC) stock has been taken to the woodshed today, yet we were compelled to initiate an alert at $29.50 for a swing trade to $32 today in our speculation and high risk room. While that quick trade worked out nicely, despite the absolutely horrific action, we think the stock actually could enjoy some bids later this year as we spent the day digesting the company, management, valuation, and performance. That said, we felt compelled to analyze the company in much more depth. First, we know the market has been terrible. Just a really volatile and rough market. Tech, particularly high revenue growth, little to no earnings type companies, are seeing their stocks largely collapse under the weight of a higher rate environment and the fears of a recession. We just saw a surprise Q1 GDP that showed contraction. It is pretty perilous out there. Then, Teladoc reported just a horrific quarter. However, we believe telemedicine is here to stay. After this horrific action, and frankly, a crash, we think you can indeed make a speculative buy.
First, the stock collapsed, and is causing panic selling. Second, waves of downgrades have now flown in from those very brave analysts with immense foresight. They have reacted to the kitchen-sink type quarter of poor news, lowering targets and ratings. That weighs.
Another major concern is that telemedicine is not something that other companies cannot replicate. There are other players out there. This leads to concern over the company having any kind of moat.
In the actual results, the company missed, badly, despite the company still having growth. Revenue missed by $3 million. That is not terrible in the grand scheme of things, but the lack of a beat in a name like this certainly was going to lead to a selloff. Then there was just a terrible goodwill charge of $6.6 billion that was recorded; however, it was a non-cash charge and had no impact on income taxes. It led to a net loss of a laughable $41.58 per share, vs. a loss of $1.31 last year.
There also continues to be dilution and costs associated with stock based compensation. Pretty standard problem, if you will, for these high revenue growth tech companies to keep talent. That said, those charges were $60 million in the quarter, hurting earnings by $0.38. On the conference call we learned:
The goodwill impairment was triggered by the sustained decline in Teladoc Health share price with the valuation and size of the impairment charge driven by a combination of recent market-based factors, such as an increased discount rate and decreased market multiples for a relevant peer group of high-growth digital health care companies as well as updates to our forecasted cash flows consistent with the revised guidance disclosed today.
So, there's that context. But they also failed to understand their potential growth and sales missed. While revenues grew, the rate of growth has continued to slow. That is a problem. Revenue increased 25% to $565.4 million, from $453.7 million a year ago. This came from access fee revenue growing 29% to $491.3 million and visit fee revenue growth of just 12% to $67.9 million.
More problems? You betcha. Even making adjustments, EBITDA declined. No bueno. Cannot have that. Adjusted EBITDA fell 4% to $54.5 million, compared to $56.6 million last year. Margins contracted, to 66.0% on GAAP vs. 67.0% a year ago. Making adjustments, there was still contraction to 66.9% from 67.8%. Folks, you cannot expect the stock to hold up, even after declines, when internal metrics like this are falling.
Another major problem is competition is truly heating up, as noted by management on the call. The company spends a good amount on marketing, and it impacted EBITDA/margins, and the bottom line. But there are chinks in Teladoc's armor now:
Over the past several weeks, we've seen lower-than-expected yield on marketing spend for BetterHelp, which is a reversal of the trends we experienced exiting 2021 and in the early part of 2022. One example of this is paid search advertising, where we've seen a notable increase in rates for keywords associated with online therapy. We believe the biggest driver of this dynamic is smaller private competitors pursuing what we think are low- or no-return customer acquisition strategies in an attempt to establish market share... When I look at the direct-to-consumer, we are seeing lower-than-expected yield on marketing spend over the past several weeks. It's really -- as I look at January and February, we saw the cost per new acquired member trending in line with our prior expectations, which is a decline from December. But that turned around against us in March, and we began to see increases in cost per acquisition and a corresponding decline in revenue yield on our advertising dollar.
This is pretty problematic if they cannot protect their moat. It is hard. But the conference call hurt them. Another gem of a line:
As we moved through the first few months of the year, we're just not seeing those deals get to closure as the sales process continues to elongate.
Translation? To us that means it will cost more, to bring in less.
Then there is the guidance, which, the market did not love, and frankly does not trust because guidance changes and failure to meet them has resulted in a lack of confidence from the Street.
However, with the stock completely being reset back to its levels many years ago when it became public, we think you can get speculative.
Look, revenue growth is stalling. It is true. But readers, the stock is now at $30 here, revalued back to the starting line. Yet, revenue is still growing. That needs to be addressed. Further, average revenue per U.S. paid member increased to $2.52 in the first quarter of 2022, from $2.09 in the first quarter of 2021 and was also up $2.49 in the fourth quarter of 2021. That is important.
Whereas much of the initial growth was in physical medicine, the company is seeing a boost in mental health services, something that is needed badly in the U.S. and internationally in our opinion. Mental health is stigmatized, and being able to work with someone from home over the internet seems like a way to help reach more people in need. Sure, the competition issue arises again, but Teladoc is delivering here, as we learned on the call:
During the first quarter, we provided 4.5 million visits through our network of clinicians, up 35% over the prior year's quarter. The biggest contributor to this growth was strength in mental health utilization.
The company also should experience growth, even though the growth rate has come to a crawl vs. a few years ago. The company sees revenue to be in the range of $2.4 billion to $2.5 billion, which would be growth of 18% to 23% over the prior year. While it is growth, it's way less than the possible $2.65 billion guided for after Q4. Where the lack of growth is slightly surprising is more adoption in the U.S. The company sees U.S. paid membership of 54 million to 56 million members, representing growth of 1% to 5% year-over-year with the remainder of revenue growth driven by expanding revenue per member. While revenue growth per user is expanding, this in our opinion now becomes the most important indicator to watch. If this does not grow, while membership grows about as expected, they will miss their guidance. They are, however, expecting total visits in 2022 to be between 18.5 million and 19.5 million visits.
There are other positives to consider, despite the poor fiscal performance. They are making some inroads, including into the New York area. On the call:
... An important new partnership with Northwell Health, unseating an incumbent competitor in the process. Many of you in the New York metro area are familiar with Northwell as New York's largest health care provider with 22 hospitals and over 800 outpatient facilities. Northwell's virtual enterprise strategy will leverage our single integrated platform that spans consumer and provider-to-provider applications both within the 4 walls of Northwell's facilities for high-acuity and emergency care and directly into the patient's home Northwell will also leverage our partnership with Microsoft to streamline clinical collaboration and communication among Northwell clinicians. This deal underscores the value of our Microsoft relationship and demonstrates the power of our integrated platform, which allows clients to operate within one platform for all their virtual care use cases.
This is a win, as beating out a major competitor is welcomed.
Another positive is the total addressable market. It is likely that this market is expanding. More and more people are connected to the internet, getting into the metaverse, and opening up more and more to using technology to communicate. This is a lasting impact of the pandemic. As the population ages, more older age brackets will embrace telemedicine, and health care providers will want to have this option. And, the global population is growing, which means the market is larger.
Finally, really digging into the outlook, if it is accurate, then EBITDA margins should start to ramp in Q2. Second half EBITDA margins will increase from around 7.5% in 2Q to low double-digits for the second half. That expansion is welcomed with a rising cost environment.
Overall, at $30 a share, we think it's now a speculative buy.
Management lost some credibility with releasing guidance for 2022 early in 2021, then updating it after Q4, then raising guidance two months ago, to then putting out this kitchen-sinked quarter and reduced guidance. Totally horrific. The growth rate has declined and stock based compensation is high, which has hurt the stock. But the revaluation has become drastically lower, and on a price to sales, price to book, and an enterprise value to EBITDA basis, the stock is somewhat discounted relative to any of its own historical metrics. The company is still growing revenues. They are winning some competitive areas. They are seeing revenue per user rising. They are getting into other health care areas. And, the total addressable market is expanding. It may take time, but we think a speculative buy could result in some serious gains. In the short term, quick profits off our buy point were recommended, but you may see a few sizable swings if the market recovers that sees the stock rally toward $40. However, we think you can take a speculative view on this one long-term now.
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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.