2023-11-29 10:52:36 ET
Summary
- Teladoc's compelling valuation, projected at 7x to 10x EBITDA for 2024, positions it attractively in the market.
- A strategic focus on aligning investments with overarching goals underscores Teladoc's commitment to operational efficiency and sustainable growth.
- Teladoc anticipates continued EBITDA growth surpassing revenue, reflecting a mature approach that factors in the challenges of the evolving healthcare landscape.
Investment Thesis
Teladoc Health, Inc. ( TDOC ) is a leading telehealthcare provider that leverages advanced technology to offer a wide range of virtual medical services. The company specializes in delivering remote healthcare solutions, connecting patients with licensed healthcare professionals through online consultations.
Teladoc's platform covers various medical disciplines, including general medical advice, mental health support, dermatology, and chronic condition management.
There's every reason possible to avoid this name. I know this. You know this. A management team that clearly was too aggressive and determined to grow at all costs.
But when I look ahead to 2024, this business is priced at somewhere around 7x to 10x EBITDA. It's difficult to make the case that a lot of negativity hasn't already surfaced and been priced into this stock.
Rapid Recap
Back in May, in my previous neutral analysis , I said,
I don't believe that relying on Teladoc to continue cutting back on stock-based compensation, will lead to improved prospects for Teladoc. The problem with Teladoc is more deep-rooted. The business is simply not self-sufficient.
And then concluded by saying,
I understand investors' proclivity to attempt to "buy the dip" when a share price is trading at close to an all-time low.
But I also believe this is a very high-risk strategy. As a whole, I remain highly skeptical of Teladoc and don't believe this stock offers investors a compelling investment opportunity.
Michael Wiggins De Oliveira on TDOC
Since that time, the share price has continued to slide lower. And yet, despite this share price trading at less than $20 per share, I still don't recommend this stock.
Near-Term Prospects
Teladoc's near-term prospects appear to be influenced by a multifaceted strategy aimed at optimizing its operational efficiency and sustaining growth across its Integrated Care and BetterHelp segments.
In the recent earnings call , Teladoc's CEO, Jason Gorevic, hinted at a comprehensive operational review, indicating a keen focus on aligning the company's investments with its strategic goals and maximizing profitable growth opportunities (more on this matter later on).
Next, its Integrated Care segment, marked by robust Chronic Care revenue growth and efficient cost management initiatives, has consistently exceeded Teladoc's expectations, contributing to margin expansion. However, the company anticipates a sequential decrease in Integrated Care margins in the upcoming quarter due to increased spending ahead of member onboarding and the expansion of W-2 physician hires.
On the BetterHelp front, Teladoc acknowledges a shift in its approach to revenue and margin growth, emphasizing a more balanced strategy.
To sum it up, Teladoc is no longer interested in entertaining growth at any cost, something we'll discuss next in more detail.
Revenue Growth Rates Are Decelerating
It's difficult to imagine that this business was once considered a high-growth enterprise. Today, the Teladoc struggles to reach 10% CAGR.
Teladoc faces certain near-term challenges and headwinds that warrant careful consideration. Teladoc's strategic shift in its approach to BetterHelp's revenue and margin growth poses a challenge. The company is now taking a more balanced stance, emphasizing profitability and cash flow, which results in a lower overall rate of top-line growth.
This shift reflects a more mature outlook on BetterHelp as Teladoc acknowledges that, as the largest player in the Direct to Consumer virtual mental health space, there are limits to the sustainable hyper-growth rates.
While Teladoc makes the case that there's still some juice left in the tank, its fundamentals reflect a whole different story.
As I look out to 2024, I find it difficult to imagine that Teladoc could return to mid-10s% CAGR. For now, I suspect that investors should think about Teladoc as a business that is growing at slightly higher than double digits CAGR.
Teladoc's Valuation -- 7x EBITDA
One notable factor is the anticipated sequential decrease in Integrated Care margins in the upcoming quarter. The cold and flu season traditionally leads to gross margin compression due to increased visit volumes. This seasonality effect, coupled with heightened spending ahead of member onboarding and the expansion of W-2 physician hires, is expected to contribute to a temporary decline in margins.
That being said, Teladoc is eager to enhance its business performance and improve its EBITDA profitability, arguing that its EBITDA growth will outpace revenue growth for the next couple of years.
Let's make the case that in 2024, Teladoc's EBITDA line will grow by 25% y/y to $415 million. This would leave its stock priced at less than 7x EBITDA.
Yes, Teladoc has a lot of blemishes. And yes, Teladoc does have a restrictive balance sheet with approximately $500 million of net debt. But even if Teladoc's EBITDA line only grows by 20% y/y rather than my estimated 25% y/y, the business is still only priced at 10x EBITDA. That's hardly a stretched multiple.
The Bottom Line
To wrap up, from Teladoc Health's near-term outlook, it's evident that the company is navigating a landscape filled with challenges.
The recent decline in stock value, attributed to an overly aggressive growth strategy by the management team, has led to increased investor skepticism. However, there's a counterargument suggesting that much of the negativity is already priced into the stock, potentially rendering it undervalued.
Admittedly, Teladoc is experiencing decelerating revenue growth rates and being forced to adopt a more conservative stance on its growth strategy.
Despite these concerns, the intriguing aspect lies in Teladoc's valuation. This stock is priced at an attractive 7x to 10x EBITDA.
It's a nuanced situation that requires careful consideration, weighing both the acknowledged challenges and the promising valuation proposition. As an investor, I find myself at the crossroads of skepticism and potential.
The time to have been bearish on Teladoc has come and gone. Therefore, I remain neutral on this stock.
For further details see:
Teladoc's Valuation Proposition: 7x EBITDA In 2024, Not So Bad