2023-05-23 09:52:03 ET
Summary
- Teladoc Health, Inc. saw its BetterHelp segment's margins come under pressure beginning last year.
- Improved margins in the segment will be key going forward.
- When adding back stock-comp, the Teladoc Health, Inc. valuation doesn't look so cheap.
How Teladoc Health, Inc. (TDOC) stock performs will likely come down to how much it can improve the margins of BetterHelp.
Company Profile
Teladoc Health, Inc. is a virtual care company that provides primary care, mental health, and chronic condition management. The company operates in two segments.
Its Integrated Health segment offers virtual general medical, chronic condition, expert medical services, and mental health services. The segment is primarily distributed on a business-to-business basis. TDOC generates revenue in the segment through per member per month ((PMPM)) access fees, as well as visit fees.
The company's BetterHelp segment is a mental health platform that connects patients with therapists and counselors via a mobile app, the web, phone, or text. The service is provided direct to consumers. TDOC generates revenue in the segment generally through a monthly access fee paid by the patient.
In 2022, 87% of TDOC's revenue came from access fees.
Opportunities and Risks
BetterHelp has been the revenue growth driver for TDOC for quite some time, and is expected to continue to do so going forward. The segment's revenue is up more than tenfold since 2019. In fact, it should be considered among the best corporate acquisitions in the past decade. TDOC bought the company for $17.2 million in 2015, and in 2022, the segment generated over $1 billion in revenue and produced adjusted EBITDA of $114 million.
Improving margins in the segment, however, will be one of TDOC's biggest opportunities moving forward. The segment's adjusted EBITDA margins took a hit in 2022 falling -568 basis points to 11.2%, and Q1 of 2023 didn't see any improvement, with adjusted EBITDA margins falling -676 basis points to 6.3%.
BetterHelp acquires nearly many of its new members via paid search and paid social media, but advertising costs in its segments started to skyrocket in Q1 2022. The company blamed VC-funded smaller competitors that were making economically irrational decisions, driving up ad costs. The company also noted that some competitors started to prescribe drugs such as Adderall, taking advantage of the temporary suspension of the regulations that prohibit the prescription of controlled substances without an in-person visit. However, the company now sees these problems as behind it, and expects margin improvement throughout the year.
On its Q1 call , CFO Mala Murthy said:
"So we are seeing retention levels stable. So I would say, if you think about the overall operating metrics for the BetterHelp business, I would say the word that comes to mind is stable, whether it be the dynamics we are seeing in terms of ad pricing, and that is allowing us to essentially deploy our capital more effectively and efficiently towards member acquisitions. The fact that member churn is stable. So there is nothing notable that we are seeing in terms of the dynamics of the business that would suggest a departure from prior quarters. Just to be very clear, what we said in our prepared remarks is we do expect to see improving margins for BetterHelp as we go through the year, sequentially as we go through the year every quarter. And the reason that we have confidence in that is, as we have talked about before, the issues that developed in the first quarter of last year are clearly behind us.
"We've been seeing more stable trends in ad pricing since, I would say, the back half of last year. We are also making a choice this year in terms of balancing revenue growth with profitability. And frankly, at the scale that we operate in, the BetterHelp business is over $1 billion in revenue last year. And with the channel diversity we have, we do have the ability to pull on more than a few levers in response to what we are seeing in the market. So to be very clear, what we did say in our remarks is we do expect to see improvement in our margins through the year. And that includes, by the way, how we deploy our A&M, the dollars we deploy in the A&M -- the dollars we deploy quarter-by-quarter and what we are seeing in the dynamics of the market."
Notably, BetterHelp's margin do have seasonality attached to them, with Q4 tending to have the biggest margins as the company typically reduces ad spend in the quarter.
One negative associated with BetterHelp is the business's generally high customer acquisition cost and the pretty low average duration that a customer stays on the platform. The company says the patient stays with the platform between 3 and 6 months. It's easier to pay up for a customer that will be with you for years, but it's certainly a lot more difficult when they will only last several months. Thus, finding the right ad spend to acquire customers versus life time value is so important.
It will also be interesting to see how a potential recession could impact the business. On the one hand, BetterHelp can be a cheaper alternative to in-person therapy, while at the same time, it is an expense people could decide to cut out of their budgets.
On the Integrated Health side of the business, the company will look to grow through the introduction of new solutions as it looks to become a "whole-person" care provider. The company just recently launched a new integrated app, and it will also introduce preventive solutions, including for weight loss and prediabetes.
The telemedicine side of the business saw some nice pull forward with Covid as visits and platform utilization jumped. Chronic care is growing a bit faster, but overall the Integrated Health business will be a slower growing business. The company is only forecasting membership to rise 1-3% this year.
Valuation
Teladoc Health, Inc. trades at a 15.3x EV/EBITDA multiple based on the 2023 EBITDA consensus of $300.6 million. Based off of the 2024 EBITDA consensus of $341.4 million, it trades at around 13.5x.
The company is projected to grow revenue 9% this year and just over 8% next year.
The stock trades at a discount to Doximity, Inc. (DOCS), but DOCS is profitable and growing much quicker.
Conclusion
With the Covid pull forward in its telemedicine business, Teladoc Health, Inc.'s core Integrated Health business is becoming a more mature, slow growth business. That puts more emphasis on its BetterHelp mental health DCT offering. This a business where the average customer stays less than a year and is heavily dependent on advertising to drive new customers. It was a great acquisition by the firm, but these aren't the most attractive dynamics of a business.
Teladoc Health, Inc.'s valuation isn't that expensive on the surface, but if you add back its over $200 million in stock comp, the valuation looks more stretched given its current growth profile. And yes, I believe stock comp is a real expense. That said, I don't think Teladoc Health, Inc.'s current forecast is all that aggressive. As such, I'm neutral on the name at present. I'm not a fan of the business, but if BetterHelp margins improve throughout the year, Teladoc Health, Inc. stock likely can trend higher.
For further details see:
Teladoc: BetterHelp Segment Margins Are Key