2023-07-28 14:47:35 ET
Summary
- Teladoc Health, Inc.'s focus on mental health services and its ability to provide accessible and effective care have positioned the company as a key player in tackling the mental health crisis.
- The looming physician shortage predicted by the U.S. Department of Health and Human Services serves as an impetus to adopt technological advancements.
- The improving cash-flow position provides Teladoc Health with the flexibility to invest in growth initiatives and continue driving innovation.
- With AI emerging as a game-changer in the world of virtual healthcare, Teladoc Health has embraced its transformative potential.
- A closer look at Teladoc's valuation suggests there is an opportunity today, but the company is lacking an important catalyst.
Teladoc Health, Inc. ( TDOC ) provides virtual care for various health needs, such as primary care, mental health, and chronic condition management. The company was founded on the idea that everyone should have access to the best healthcare, anywhere in the world, on their terms. Teladoc Health has over 20 years of experience in delivering high-quality telehealth services to millions of people around the world. The company's vision is to make virtual care the first step on any healthcare journey by creating a unified and personalized consumer experience, developing technologies to connect patients and providers, delivering the highest standard of clinical quality, and enhancing health decisions and outcomes with data and insights.
In the second quarter of 2023, Teladoc Health demonstrated impressive financial and operational achievements, marking yet another milestone in its journey of delivering innovative virtual healthcare solutions to an increasingly demanding marketplace. The company's unwavering commitment to the intersection of quality and cost of care has enabled it to set new standards in the industry, a fact reaffirmed by the company's success in the second quarter.
At the height of pandemic fears, Teladoc emerged as an obvious winner amid mobility restrictions. TDOC stock reached a high of close to $290 in early 2021 but has since then shed almost 90% of its value. Teladoc's current valuation, favorable macroeconomic conditions, and the company's market position suggest there is an opportunity investors can exploit today. But the company lacks a key earnings catalyst to drive the stock higher.
Second Quarter Performance And Opportunities In The Mental Health Market
Teladoc Health reported a 10% year-over-year increase in revenue to $652.4 million in the second quarter. This growth is a testament to the company's strong positioning in the market and its ability to cater to the evolving needs of its customer base. A key highlight of this growth is the balanced expansion across various revenue streams. Notably, the company recorded 11% growth in access fees revenue to $575.7 million, and a 4% increase in other revenue to $76.7 million.
Within the Teladoc Health Integrated Care segment, revenue grew 5%, reaching $360.1 million, which emphasizes the company's effective approach to serving the broader healthcare ecosystem. The growth was driven in part by higher enrollment in the chronic care program. Furthermore, the exceptional growth in the BetterHelp segment, with revenue surging by 18% to $292.4 million, is a testament to Teladoc Health's capability to address the unique needs of mental health services. In a time when mental health has become an increasingly crucial aspect of healthcare delivery, Teladoc Health's success in this domain reaffirms its position as a leading player in the industry.
Exhibit 1: BetterHelp segment revenue
Recent data published by Statista is a stark reminder of the scale and impact of mental health challenges in society. With revenue in the mental health market projected to reach $10.59 billion in 2023, the demand for effective and accessible mental health services is evident. A significant 21% of adults, equivalent to over 50 million Americans, are experiencing a mental illness. Furthermore, 15% of adults have a substance use disorder, with a staggering 93.5% not receiving the treatment they need. Additionally, the mental health crisis extends to the younger population, with 16% of youth suffering from at least one major depressive episode in the past year, and more than 2.7 million youth experiencing severe major depression.
Exhibit 2: Mental health market revenue in the United States
Amid these concerning findings, Teladoc Health's success in the BetterHelp segment shines as a beacon of hope for investors. The company's focus on mental health services and its ability to provide accessible and effective care have contributed to its position as a key player in tackling the mental health crisis. However, the statistics also reveal that there is a lot of work to be done. Over 28 million individuals, equivalent to 55% of adults with a mental illness, receive no treatment at all. This treatment gap highlights the urgent need for accessible and inclusive mental health services that can reach those who are currently underserved. Teladoc Health's success in the BetterHelp segment is not only a reflection of its business growth but also of its meaningful impact on people's lives. By providing a platform for virtual mental health care, the company is actively bridging the treatment gap and making a positive difference for millions of people seeking support.
The company's encouraging performance in Q2 was not limited to its domestic operations. Teladoc Health also demonstrated its capability to capture international markets effectively, as evidenced by the impressive 28% growth in international revenue, which came to $90.6 million.
Exhibit 3: U.S. & international revenue
The improving fundamentals of the company can be seen in the operating cash flow of $101.2 million and the free cash flow of $64.6 million reported for the second quarter. The improving cash-flow position provides Teladoc Health with the flexibility to invest in its growth initiatives and continue driving innovation. A noteworthy highlight is the second quarter's adjusted EBITDA of $72.2 million, which surpassed expectations. This was the result of the company's strategic focus on introducing and expanding new products and services, staying at the forefront of technological advancements. Additionally, Teladoc Health's emphasis on vertical integration of care allowed it to capitalize on the growing demand for seamless virtual and in-person healthcare experiences.
Capitalizing On The Growing Demand For Virtual Care
Teladoc's emphasis on a whole-person approach sets it apart in the market. Teladoc Health's ongoing shift toward whole-person strategies has resulted in more clients recognizing the value and effectiveness of holistic care. As a result, the company's chronic care members are increasingly enrolling in multiple programs with numbers increasing to 1,073,000 in Q2, demonstrating the growing demand for comprehensive healthcare solutions. The stability in customer acquisition costs and consistently strong gross margin performance have contributed to significant margin improvements over the second quarter of the previous year as well.
Exhibit 4: Chronic Care Program enrollment
Recently, Teladoc Health also conducted a survey that provides valuable insights into the rapidly evolving healthcare landscape and the increasing demand for virtual care solutions. The survey findings reveal that three out of every four employers expect to increase their spending on virtual care over the next three years, presenting significant opportunities for Teladoc Health. This surge in interest also serves as validation for the company's approach, which has been centered around delivering innovative and whole-person virtual care solutions to meet the evolving needs of consumers and employers alike.
The survey highlights a growing trend among employers, with over half of them planning to implement a comprehensive whole-person virtual care strategy over the next three years. This shift toward consolidating vendors signifies a strategic move by employers to provide their workforce with streamlined and holistic healthcare solutions. As consumers increasingly seek more convenient and affordable options, comprehensive virtual care is becoming the preferred first stop on their care journeys, and Teladoc Health is at the forefront of serving this market need.
Notably, the survey also indicates a strong interest in health plans that incentivize virtual care. This aligns perfectly with the ongoing market demand for accessible and cost-effective healthcare options. With consumers seeking more personalized and convenient care, Teladoc Health's provider-based care programs, such as the upcoming weight management program, are gaining traction. This program, developed in collaboration with Teladoc Health physicians, goes beyond medication alone, offering tailored support to help patients lose weight effectively and manage the costs of high-priced medications such as GLP-1 drugs.
Revolutionizing Virtual Healthcare With The Power Of AI
With AI emerging as a game-changer in the world of virtual healthcare, Teladoc Health has embraced its transformative potential across the business to further enhance patient outcomes, streamline processes, and improve the overall healthcare experience. The company has more than 60 proprietary AI models and is leveraging cutting-edge technology to strengthen its products and create an exceptional experience for its members.
One area where AI has made a significant impact is the virtual care queuing system. Handling tens of thousands of visits daily is a complex task that requires considering numerous factors like provider licensing, availability, geography, specialty, and patient preferences. With the help of AI, Teladoc Health efficiently connects patients with the right providers in real-time, ensuring seamless access to care and enhancing overall patient satisfaction. This ability to scale efficiently not only improves patient experience but also contributes to Teladoc Health's continued growth.
The use of AI extends to the BetterHelp segment as well, where it plays a pivotal role in optimizing member-therapist matching. Mental health care relies heavily on finding the right provider, and Teladoc Health's AI-driven approach matches patients with suitable therapists based on over 100 different criteria. Remarkably, the platform has achieved an average matching time of just 30 seconds, setting a new industry standard for swift and personalized care delivery.
Apart from enhancing patient and provider experiences, AI also fuels Teladoc Health's strong gross margin performance. By leveraging AI-driven solutions, the company achieves greater operational efficiency, further solidifying its competitive edge in the virtual healthcare market.
Additionally, AI empowers Teladoc Health to deliver personalized content and insights to its members, promoting sustainable behavioral changes. The platform offers customized next-best actions on a massive scale, driving better healthcare outcomes while reducing costs. Recognizing that one-size-fits-all approaches are inadequate, Teladoc Health's AI-driven personalization ensures that each member receives tailored care that aligns with their unique needs. Looking to the future, Teladoc Health is expanding its AI capabilities through a strategic partnership with Microsoft Corporation (MSFT).
By integrating Microsoft's OpenAI services and Nuance DAX capabilities into the Teladoc platform, the company aims to automate clinical documentation during virtual exams. This will help alleviate the administrative and documentation burdens faced by physicians, enabling them to focus more on their patient's needs and strengthening the doctor-patient relationship. According to Accenture, a significant 70% of tasks performed by healthcare workers have the potential to be reinvented through technology augmentation or automation. This highlights the immense opportunities for integrating advanced technologies in the healthcare sector.
Exhibit 5: The healthcare delivery reinvention journey
Nuance's solutions seamlessly work with core healthcare systems, including Electronic Health Records, and are widely used by physicians, radiologists, and hospitals in the U.S. This integration presents a promising opportunity to leverage AI to ease the administrative burden on healthcare professionals, empowering them to focus on delivering better patient experiences.
The looming physician shortage predicted by the U.S. Department of Health and Human Services serves as an impetus to adopt technological advancements that can improve the efficiency and efficacy of healthcare delivery. By leveraging AI-driven solutions, telehealth providers including Teladoc Health are taking a proactive approach to meet the evolving needs of an aging population while alleviating the strain on healthcare professionals.
Great Story, Okay Numbers
I am a growth investor. I regularly invest in businesses that are years from profitability and free cash flows. Teladoc Health is generating free cash flows today, which is very encouraging. However, free cash flows should be used to complement our projections for a company's profitability - not to substitute net income. By incorrectly using free cash flows as the sole profitability metric, investors are likely to end up owning a bunch of companies that never go on to become GAAP profitable and eventually collapse. Below are some of the common pitfalls of relying entirely on free cash flows ("FCF") to reach investment decisions.
- FCF can be manipulated in the short term by reducing investments. Although higher FCF in the short run will entice investors, the company may lose its competitive positioning in the market due to a lack of investments in the long run. Because modern-day investors tend to value FCF more than profits, managers may be incentivized to achieve better FCF in the short run while keeping investments low. This will create a significant divergence between the interests of shareholders and managers in the long run.
- FCF does not account for non-cash expenses, which is the whole idea of using FCF anyways. However, investors should not be blinded into thinking that these non-cash expenses are not expenses. In fact, these are real costs that are associated with the asset utilization of a company in most cases.
- FCF does not measure how efficiently a company is managing its costs while focusing on growth.
The list goes on. Although I encourage investors to use free cash flow every single time before making an investment decision, I also encourage investors to never use FCF as a standalone measure of profitability.
Coming to Teladoc, I am encouraged by the recent improvements in the operating margins of the company on the back of stellar revenue growth. From just $19.9 million in 2013, Teladoc's revenue has grown exponentially to $2.41 billion in 2022. Although gross margins have not meaningfully improved, the operating margin has trended in the right direction in the recent past, suggesting the business is becoming more efficient with scale.
Exhibit 6: Profit margins
Teladoc's improving operating margins, combined with positive free cash flows, have boosted my confidence in the company's ability to turn profitable in the future. The market does not seem to be satisfied with the improvements in Teladoc's financial performance, which is evident from the historically low price-to-sales multiple at which Teladoc is valued today.
Exhibit 7: P/S ratio
This sounds like an opportunity. However, a closer look at earnings estimate revisions - a key earnings data point that I closely monitor to gauge a measure of the expected market momentum for a stock at any given time - suggests Teladoc is lacking an earnings catalyst to drive the stock price higher. I am cautious yet optimistic about what the future holds for the company, but at the same time, I believe the competitive environment should be monitored closely as the company is yet to benefit from long-lasting competitive advantages, which leaves room for disruption.
Takeaway
Teladoc Health's exceptional performance in the second quarter solidifies its position as a trailblazer in the virtual healthcare domain. Teladoc Health's partnership with Microsoft to integrate advanced AI capabilities highlights its dedication to enhancing patient care and alleviating physician burdens. By embracing cutting-edge technology, the company continues to lead the way in virtual healthcare delivery.
I am encouraged by Teladoc's prospects and I believe the company deserves to trade at higher P/S multiples in the future as it nears an inflection point in its growth story which could help Teladoc break through to profitability. I am yet to invest in Teladoc, and if I end up pulling the trigger, I will not allocate more than 3% of my portfolio to TDOC given the room for disruption in the telehealth industry.
For further details see:
Teladoc's Future: Virtual Healthcare, AI, And Valuation