2023-09-14 07:00:00 ET
Summary
- COVID cases are on the rise, raising concerns about the possibility of another dangerous wave this winter.
- In the first wave, Teladoc's stock quickly soared to all-time highs due to the lockdowns.
- This time, however, the focus is on trying to fight the new wave without lockdowns, as they have more downside than upside.
Thesis
As the summer months end in the Western world, COVID numbers are on the rise again. So will this be another winter of lockdowns and mask mandates that would help a stock like Teladoc Health (TDOC)? I do not think so, but as we have learned over the past few years, COVID is unpredictable. Should the unexpected occur and a new lockdown be imposed, it would most likely send some of the high-flying stocks of 2020 back to the top. And TDOC would probably be one of them.
However, I think that lockdowns are unlikely, so I do not believe that the next COVID wave will have a major impact on TDOC. But just in case, let's take a look at how TDOC reacted to the lockdowns and what some health experts and governments think is most likely to happen in the winter of 2023 / 2024.
How has Teladoc stock responded to the other waves of Covid?
At the beginning of COVID, which was characterized by a lot of uncertainty, the TDOC stock soared to all-time highs as the telemedicine sector was hyped due to the lockdowns around the world. No one knew how long the situation would last, and many people painted doomsday scenarios. But as the first countries began to reduce their measures, the TDOC stock began to fall and is now down nearly 90% from its peak.
However, when we look at the revenue trend, we see a steady increase even after the lockdowns ended and people were able to go to the doctor in person. Telemedicine is here to stay, and I think the number of people using TDOC or its competitors will increase every year. I think a lot of people see this stock as a failure because of the sharp drop in price, but the gambling with stocks in the beginning of COVID just put a lot of stocks in the bubble territory that actually has a good and solid business model. This stock and the industry it operates in definitely has a future.
Still, growth rates have slowed , in part, of course, because the incredibly strong growth during COVID took out much of the growth that would likely have occurred later.
Although the company is not profitable on an EBIT basis, it is FCF-positive and has a five-year revenue CAGR of 50% . So while the stock has fallen from its justifiably overvalued levels, the business metrics have improved.
TDOC's Competition
However, the competition is intense as Amazon's ( AMZN ) Amazon Clinic is now accessible in all 50 states . Amazon is just so much better funded, and they have a lot of opportunities to cross-sell and leverage their expertise and data from other of their companies. Warren Buffett has a good mind game where he considers whether or not you could replicate the success of a company with enough money. If you can't because of some competitive advantage like a brand or something, it's a wonderful company. But in the case of TDOC, I would say you could replicate the company if you had enough money. And their problem is that a competitor like Amazon has enough money to do it if they want to.
Amazon's distribution network, which is a strong competitive advantage, is also very helpful in this case. So right now I do not see TDOC as having a moat. Additionally, I think Amazon has a long-term plan in healthcare that will make Amazon Clinic a much larger product over the next 5 to 10 years.
But just because other companies are better financed does not mean that TDOC is a bad investment. They could be acquired, and even as a second or third option in a market with strong growth potential, they could provide shareholders with excellent returns. However, I also think that the market could be disrupted by AI / ML and its ability to detect patterns to improve the early detection of diseases. In general, I think we will see rapid improvements in many areas of our lives, and therefore many companies and industries will have to evolve quickly if they want to survive.
Will there be another dangerous COVID wave this winter?
After nearly 4 years with COVID and many months of lockdown and pandemic containment measures, we are approaching another winter. Will there be new lockdowns because of some new COVID strains or will the world return to normal as it was before the pandemic?
Christina Pagel of University College London says she thinks it is unlikely that lockdowns will happen again . The article goes on to say that the downside of another lockdown would be greater than the upside. However, new mutations could lead to measures that were previously unthinkable. With COVID, it is really hard to make the right predictions, as we have seen over the last few years. Things can change quickly.
In the U.S., for example, the first mask mandates are back . Erin, the dominant strain, has forced some universities and companies to require employees to wear masks again as COVID cases have increased. The European Center for Disease Prevention and Control released an update for the autumn of 2023 at the end of August, stating that COVID cases are increasing, but the increase is lower than in previous waves. But in the final months of the year, the number of cases is likely to rise as more people stay indoors, increasing the risk of infection. The focus will be on protecting people over the age of 60 through a new vaccination campaign.
The UK says the period of greatest risk is likely to be between December 2023 and January 2024 , so they are trying to vaccinate as many at-risk people as possible in October 2023 to give them the best protection. In the U.S., the number of people hospitalized with COVID is about 1/3 of what it was last year, but as the immunity to COVID decreases over time, they also plan to release new vaccines in mid-September . For anyone interested, the Center for Disease and Protection will host a webinar on September 19 to discuss their preparations.
So all in all in Europe, the US and Canada the most dangerous period will be January and December, but right now it looks like we will not be getting lockdowns, and vaccines and masks are probably the way we will try to fight COVID and the flu this winter.
In the world's two most populous countries, China and India, the situation is different. Data on hospitalization rates in China are difficult to find because they are no longer reported. However, a recent study said that COVID will most likely have an impact on China after they ended their strict COVID policy. But new closures also seem unlikely after they lifted them just a few months ago. The head of the government's COVID task group in India said they do not see a big threat from the latest strain , which has been active in India since May, and they have not seen a big increase in hospitalizations or deaths.
TDOC's Valuation
TDOC has a reasonable balance sheet with $958 million in cash and $1,537 million in LT debt . Because they are FCF-positive and can easily service interest, the downside risk should be protected. The dilution of shareholders is not pleasant, but not as extreme as in other well-known stocks today.
And the PS ratio, especially if we look at the extremes, is fair these days. With a ratio of 1.4x, we cannot speak of an overvaluation. But I do not think there will be strong COVID restrictions this winter and fall that will send their sales soaring, but they should still grow their sales in the low double digits going forward.
The risk/reward is more favorable now than it was when the stock was hyped and many people were talking about it. However, as this is an industry that can change very quickly, a risk remains. Some people argue that TDOC has a moat because they have the most doctors, but in my opinion, this is a weak moat that can be easily attacked. Money is a big incentive, and if someone with a lot of money offers doctors more money to switch platforms, many will take it. The question is whether a moat grows or shrinks over time.
In conclusion, TDOC operates in a very interesting sector that is likely to grow strongly in the future. However, competition is fierce and the whole industry could look very different in 5 years as it has the potential to change rapidly.
And personally, I would not recommend speculating that the COVID cases will be so bad this winter that they will have to lock everyone up in January or December. Most likely the time for lockdowns is over.
For further details see:
Teladoc Stock: A Hold Amid New Covid Wave