2023-11-29 10:31:00 ET
Summary
- Teladoc is expected to benefit from the growth of the telehealth industry in the coming decade.
- The company has shown significant improvement in profitability and operational perspectives, with strong and consistent growth in adjusted EBITDA.
- Teladoc is experiencing a more favorable competitive environment, with weaker competitors exiting the market and the company seeing an increase in members.
Introduction
Teladoc Health, Inc. ( TDOC ) is a company operating in the telehealth industry. In my previous articles covering the company, I have been bullish on the company's future prospects. Unfortunately, the company's market capitalization slid far greater than any major indexes. During these past few articles, I believed the telehealth industry's growth would provide a meaningful tailwind, which was wrong likely due to the unprofitability of the company combined with an expensive valuation multiple. Today, despite these past results, I have a strong reason to believe that the tide has turned for Teladoc. Not only is the telehealth industry expected to provide a meaningful tailwind going forward, but the company's profitability and operational perspectives have shown significant improvement in the past year. Therefore, I am rating Teladoc as a strong buy today.
Telehealth Industry
Since the pandemic times, the digital shift in numerous industries has been ongoing, and this is likely the case for the telehealth industry as well. Patients can access healthcare in the comfort of their homes whenever they need the service eliminating the need to travel and wait for the doctors. For certain cares, such as chronic care, mental health care, and primary care, telehealth services remain viable alternatives to traditional methods. As such, global telehealth services are expected to grow at an impressive rate to hit $450 billion in 2032 . The global market size for telehealth was $82 billion in 2022 meaning that this particular research from Emergen expects the CAGR to be about 18% for the coming decade. As such, I believe it is reasonable to argue that the telehealth industry's growth will provide a meaningful tailwind to Teladoc in the coming years.
Operational Improvements
Teladoc has improved significantly in the past year as the management team has been focusing on pursuing balanced growth. As a result, looking at the 2023Q3 earnings report presentation reported on October 24th, the company reported positive results and trends.
Adjusted EBITDA increased about 73.44% year-over-year. As shown in the chart below, the company's impressive adjusted EBITDA growth was not a one-time phenomenon, instead, Teladoc has been reporting strong and consistent growth in the adjusted EBITDA for the past few quarters.
[Chart created by author using Source ]
Further, Teladoc is guiding for an adjusted EBITDA of $112 million at the midpoint, for the coming 2023Q4 which is a growth of about 26.13% quarter-over-quarter. Thus, I believe it is reasonable to argue that the company, in terms of profitability, is moving in the right direction with a strong trend.
Teladoc's gross margin data also supports my argument that the company is moving in the right direction as shown in the picture below, which reflects the improving gross margins over the past few quarters.
[ Source ]
The above data and my arguments regarding the company moving in the right direction are also reflected in the management team's strategy and focus going forward. During the 2023Q3 earnings call , the management team said that "we continue to take a more balanced approach than we had historically to revenue and margin growth," and "we will continue to focus on improving bottom line performance, and we're confident that we can continue to deliver significant EBITDA margin expansion." As such, it is likely for Teladoc's bottom line to continue moving in the current trajectory for the foreseeable future.
Potential Concerns
There are risks to my argument. Some investors may point out that a balanced growth or an improvement in the bottom line came at the cost of top-line or revenue growth, and even then, the company is reporting GAAP net loss. While this is a legitimate risk to my bullish thesis and concern, I believe these concerns are overblown.
First, going back to the 2023 earnings call, the management team has made it clear that one "shouldn't view the fourth quarter as being indicative of the underlying growth of that business." It is true that the company's focus today heavily leans toward profitability over top-line growth, but as the expectation for the telehealth industry's growth, as discussed earlier, and the management team's view of an "even greater potential" going forward reflects, I believe it is premature to argue that the company's potentially temporarily subdued top-line growth poses a risk to the bullish thesis.
Second, the market has been punishing non-profitable companies as the interest rate environment has toughened over the past few years. However, although Teladoc is still on a path to profitability, I do not think these concerns pose significant risks. Looking at the 2023Q3 earnings report , net cash provided by operating activities in the most recent quarter was $105.6 million. Further, the company had a positive net interest income of $6.9 million as the interest income exceeded the interest expense indicating a healthy balance sheet.
Teladoc has cash of about $1.03 billion and total assets of about $4.33 billion. On the other hand, the company's total liability stands at about $2.03 bringing the total liability to asset ratio to only about 46.88%. It is true that the company's assets include goodwill and intangible assets, but considering both the cash pile and net interest income flow, I believe it is reasonable to argue that the company's financial position is healthy.
Overall, for these reasons, I believe the potential risks and concerns, while being relevant, are overblown.
Competitive Environment
The competitive environment is becoming more favorable for Teladoc. During the pandemic, numerous competitors entered the market as the growth rate of the telehealth industry was accelerating at the time; however, these phenomena were proven unsustainable. During the 2023Q3 earnings call, the management team said that the company is "seeing significant competitive takeaways," which is "a direct result of other players struggling to deliver for their clients and in some cases fallout from unprofitable business models with weak balance sheets."
As a result of weaker competitors exiting the market, Teladoc has already started to see benefits, which is reflected in the company's increasing number of members. Looking at the 2023Q3 earnings report presentation, the company's U.S. Integrated Care Members increased about 10.13% year-over-year and about 5.01% quarter-over-quarter. The majority of this increase happened quarter-over-quarter as the new members grew by 4.3 million. Regarding this trend, the management team, during the earnings call, said that "the significant membership growth during the quarter was primarily a result of a large competitive takeaway during the quarter."
While it is likely too early to assess the risks of other major telehealth players such as Amazon.com, Inc. ( AMZN ), the industry seems to be consolidating creating a beneficial environment for Teladoc.
Valuation
Teladoc is an unprofitable company operating in an arguably new industry, telehealth. Teladoc has no other established and profitable industry peers to compare the valuation. Thus, investors should note that there are inherent risks involved in how the market will value the industry and the company going forward as there are not enough historical data points to rely on.
Despite these conditions, I believe Teladoc is undervalued. The company currently has a market capitalization of about $2.85 billion, and Teladoc has a price-to-sales of 1.09 . Essentially, the market is valuing a company that is operating in a fast-growing industry, improving EBITDA levels, reporting net interest income, and achieving a strong balance sheet at just over one times the revenue. Slower growth during the pandemic times and the unprofitable state of the company is a hindrance to high valuation, but as I have addressed earlier, focusing on the direction of the company, the valuation seems low. Growth is slowed down by the market conditions and the management team's temporary approach to improve the bottom line, and the company's bottom line, reflected by EBITDA, has been growing fast with an expectation for this trend to continue. Therefore, I believe the current valuation is cheap.
Summary
It may be true that the old saying that even a broken clock is right twice a day applies to my current article. My bullish thesis in the past covering Teladoc has been wrong, and my current bullish thesis may as well be wrong again. However, due to the arguments I have listed above, I believe it is reasonable to be bullish today. Not only is the industry likely to provide a tailwind for multiple years ahead, but the company's financials, operations, and competitive environment are attractive today. Therefore, I believe Teladoc is a strong buy.
For further details see:
Teladoc Q3: Getting Stronger (Rating Upgrade)