Teladoc (NYSE: TDOC) was everyone’s favorite in 2020 until February 2021 and has since plummeted, dropping as low as 82%. The company got rid of its valuation bubble and is now a buy at these attractive long-term levels.
Teladoc is the leader in virtual care and virtual mental health treatment. The company is beginning to forge a moat with its services ecosystem and data leadership, striving to be what Adobe is for creative work, for the healthcare space.
According to Fortune Business Insights, the global telehealth market will grow at an astonishing CAGR of 32%, from $90 billion in 2021 to approximately $640 billion in 2028. We must keep in mind that 2020 has seen an acceleration telehealth market and the market peaked at $144. b in 2020 and decreased by almost 40% in 2021.
As you can see in the chart below, Teladoc showed a lot of strength during this massive downturn in the overall market. They continued to show strong performance in terms of total visits and usage rates, while competitors experienced negative visit growth.
Teladoc has several growth levers, but for some reason management continues to report less important metrics. They continue to guide revenue and adjusted EBITDA in absolute figures, but then refer to EPS? Due to their historical dilution, they should guide all of these in the per-share metrics.
They also guide for US paying members which metrics Wall Street likes to reference the most. I strongly believe that there are better metrics to gauge TDOC’s growth:
- Usage – The percentage of paying members who actively use their services
- PMPM – income per month per member
- “Member Usage” – a metric I personally use – Paid Members * Usage
These KPIs paint a more accurate picture in my opinion, as they take into account actual product usage and the amount of revenue each member contributes.
In the graphic below you can see my model for member usage. We can see that the growth of paying members has only increased by 22% in the last 8 quarters. However, all other measures far exceeded it. Utilization is up 870 basis points or a 69.4% increase. PMPM is up 186% and my member usage metric is up 106%. I think these KPIs more accurately describe the performance of the business.
This miscommunication in investor relations got even worse when Teladoc introduced its new way of measuring members. On their Investor Day, they bundled 23 million more members into the Teladoc membership pool, including overlaps, and then also added 16 million people who had the services offered, but didn’t sign up. To wrap up this segment: Teladoc is a massively misunderstood company, primarily due to poor investor relations communication in my opinion. Slower paid member growth due to demand being pulled forward due to COVID does not accurately represent company performance.
Scope of services
The reason Teladoc was able to maintain visitation retention and increase usage as the market declined (meaning they took market share) is their unparalleled range of services in their portfolio. .
As you can see in the graph above, Teladoc has six different branches of operations that create an intertwined service network with lots of synergies. In the usage chart I shared earlier, you can see an acceleration in usage growth from Q4 20 to Q1 21. That’s when Teladoc acquired Livongo Health through a massive deal of $18.5 billion, mostly paid in TDOC stock. Livongo offers great cross-selling opportunities and is a great addition to their service network. Additionally, Livongo has enabled Teladoc to harvest billions of data points from patients via Livongo monitoring devices. In the future, these data points can be leveraged to continuously improve their AI and increase the effect of their services, a flywheel of sustainable growth. A visualization of the data flywheel can be seen in the chart below.
Major technological partnerships
Over the past year, Teladoc has partnered with Microsoft (MSFT) and Amazon (AMZN). These partnerships show that Teladoc’s solutions are preferred by some of the largest companies and that they are looking to integrate them into their services.
In July 2021, Teladoc partnered with Microsoft to integrate Teladoc’s Solo platform (acquired with Intouch Health in 2020) into Microsoft Teams. The Solo platform is developed to offer a suite of services to hospitals and other healthcare providers. Microsoft Teams is already used by a large portion of hospitals in the United States and will greatly help Teladoc gain market share and mindset in this space. The partnership doesn’t end there though, both companies are working on AI capabilities and Teladoc plans to create an API marketplace for healthcare solutions. I think Teladoc could leverage its partnership with Microsoft to establish an API Marketplace in cooperation with Azure.
In February 2022, Teladoc partnered with Amazon to bring health services to Alexa. A recurring theme over the past few years has been the fall in TDOC stock after Amazon’s healthcare news. The narrative that Amazon will compete with Teladoc and take market share from them is likely to slow with this first stage of a partnership between the two companies.
Other big tech companies like Google are also showing interest in Teladoc’s services, even though they invested $100 million in American Well (AMWL) in the IPO. This shows the clear advantage of Teladoc’s offering over its competitors in my opinion.
Teladoc is not yet profitable on an earnings basis, due to significant losses from the Livongo merger in 2020. Although not profitable on EPS, the company is generating growing free cash flow to fund its growth . That’s why I prefer to look at enterprise value/sales, enterprise value/EBITDA, and free cash flow yield for Teladoc. During the pandemic, multiples have increased significantly from their pre-pandemic averages. EV/S increased from 7 to 17, while EV/EBITDA stagnated around 120 times. Teladoc had no free cash flow before the pandemic, so historical values are quite volatile. In the chart below, we can see that the multiples have now contracted significantly. The EV/S fell from 17 to 4, the EV/EBITDA from 120 to 31 and the free cash flow yield is currently 1.7%.
Considering the company has guided a 25-30% CAGR in revenue and I expect continued multiple expansion, this presents a compelling buying opportunity for Teladoc Health. Teladoc is already a big part of my portfolio with a 6% allocation.