2023-10-25 15:30:12 ET
Summary
- Teladoc Health, Inc. stock has been slaughtered, reaching levels not seen in over 6 years.
- Despite recent poor performance, there are fundamental reasons to be hopeful for future gains.
- The company's operational review and improved efficiency sets up a speculative trade opportunity.
- Cash flow is a hidden but clear positive.
Teladoc Health, Inc. (TDOC) stock has been absolutely crushed. We last traded this stock a year ago in November 2022, and the stock hit our target exit of $33 in February for a 20% gain. Since then, we have not touched it. However, the stock has been obliterated in recent months and we think it is setting up for another speculative trade.
This is a nasty chart, and we are back to levels last seen over 6 years ago. This is painful. Short term, there is no chart support, but there are fundamental reasons to be hopeful for future gains. Here is how we would play it.
The play
Target entry 1: $17.00-$17.50 (40% of position)
Target entry 2: $16.00-$16.25 (60% of position)
Stop loss: $14
Target exit: $20
We like selling $17.50 puts for December for $1.25 credit as a viable play.
Recent performance shows the stock's obliteration was justified
This is a speculative play, but frankly the just-reported results we thought would have led to a much larger decline did not, as so much bad news already was baked into the stock. And stocks tend to bottom on bad news. It was hard to look at this quarter as good news, but it was mixed we would say, and the future is looking brighter for this troubled stock as the company is going to undertake an operational review and we can expect future changes. We view that as bullish.
In the actual Q3 results, the company beat consensus estimates for earnings but missed on revenues. The company is still showing growth, but the rapid growth has slowed. Revenue missed by $2 million. That is not terrible in the grand scheme of things, but was not all that strong, either. On the earnings front, there was a loss of $0.35 per share, which was $0.02 better than expected, and a $0.10 improvement from a year ago. So, that is a positive.
While revenues grew, the rate of growth has continued to slow. That has been a problem, in part triggering an operational review. Revenue increased just 8% to $660.4 million, from $611.4 million a year ago.
So, the repricing in shares has to do with the fact that 8% growth is absolutely nowhere near where it was in the past. Most of this growth came access fees which grew 8% to $582.1 million while so-called other revenue grew 10% to $78.2 million. U.S. revenue grew 7% to $569.3 million and International revenue grew 17% to $90.9 million. Digging deeper into the sales, we see that the Integrated Care segment revenue was up 9% to $374.4 million while the BetterHelp segment saw sales up 8% to $285.8 million.
Folks, while this is growth, it is just not enough for a company losing money. As such, the stock continues to suffer. In response to the moderated growth we think it is quite bullish that an operational review will be undertaken. CEO Jason Gorevic said in a statement last night:
We will accelerate our efforts to drive value through improved business performance across the enterprise, undertaking a comprehensive operational review of the business to further improve our efficiency.
We think the timing of our trade, which is speculative, may capture upside. Frankly, the stock is down 3% at the time of this writing while the market is getting crushed. It is kind of a low-key win. Now we are glad to see this review for efficiency because one of the biggest issues the Street has with the stock has been weakening EBITDA over time. However, that trend has been reversing. Adjusted EBITDA increased 73% to $88.8 million, compared to $51.2 million a year ago. In the year ago Q3, adjusted EBITDA had fallen 24%. So this is great progress. On the segments, we saw big increases. Integrated Care segment adjusted EBITDA increased 62% to $62.8 million in while BetterHelp adjusted EBITDA increased 133% to $26.0 million. Those are wins, and as you can imagine, margin was up too. Adjusted gross margin was 71.8%, compared to 69.6% a year ago.
All of this combines with a growing membership, as well as increased revenues per member. In total, the Integrated Care segment added over 4 million members during the quarter, ending at 90.2 million. Average Integrated Care revenue per U.S. member of $1.41 increased $0.01 over last year.
And cash flow is improving. That is a huge positive here. Cash flow from operations was $105.6 million versus $63.0 million a year ago. Further year-to-date, cash flow was $219.9 million versus the comparable 2022 period of $123.7 million.
The outlook for Q4 was a touch unimpressive, however, but free cash flow guidance was raised. Management now expects full year free cash flow of approximately $175 million, up from the prior expectation of $150 million. But the top line for Q4 will be a wide $658 million to $683 million. Consensus was $686 million. This assumes a high single-digit percent year-over-year growth in the Integrated Care segment and low to mid-single-digit year-over-year growth in the BetterHelp segment. That came in lower than high single-digit growth expectations for both. So that was some bad news, coupled with the miss.
That said, we are looking for an inflection from here given the operational review. Obviously, real action needs to be taken from the review, but it is a very positive catalyst, and we think it sets up a speculative trade.
Final thoughts
Teladoc Health, Inc. stock has been obliterated, but appears to us that there is a catalyst for upside as the company seeks to be more efficient. Revenue per member is up, membership is up, and the cost to acquire customers is coming down. Further, cash flow has increased significantly. We think a lot of bad news has been priced in and it is set up for a bounce from levels not seen in over 6 years.
For further details see:
Teladoc Was Obliterated