Teladoc: Growth Prospects Still Intact, But Upside Limited On Valuation – Teladoc Health, Inc. (NYSE:TDOC) | Seeking Alpha

Summary

Teladoc has doubled in valuation since our previous article around six months ago and has surpassed our optimistic expectations.

The company continues to exhibit strong growth and has multiple growth vectors at its disposal.

We have a very favorable view of the industry and TDOC’s leadership position, however today’s valuation appears to be a bit rich.

We think the stock may have limited upside at today’s valuation and recommend value investors to monitor from the sidelines and look for a more reasonable entry point.

Investment Thesis

In our previous article, we presented a a detailed view on Teladoc’s (TDOC) business and growth prospects. We theorized that the market was not fully appreciating the growth opportunity ahead for the company and the stock price was undervalued. Fast forward to today and our theory has panned out faster than we anticipated with the stock price almost doubling and in fact surpassing our expectations. In this article we will aim to provide an update on the company with a focus on any changes to its fundamental value. We also provide an updated forecast and valuation for the stock. Ultimately, we theorize the view that although the company still has significant growth prospects to tap into, the stock appears fully valued at today’s price and investors should wait for a better entry point to establish a long position.

Stock price since last article (Source: Yahoo Finance)

Company Overview

TDOC provides a software that allows users to access a scaled network of medical professionals over their mobile phones from anywhere with an internet connection. The company also provides access to doctors over a traditional land-line. A key point to note is that the company’s competitive advantage doesn’t come from its software (which is actually not difficult to develop), instead the competitive advantage lies in the vast network of medical professionals that readily provide services on TDOC’s platform. Majority of the company’s consultations fall in the general medicine category however the company has been increasing its mix of services including mental health, dermatology, sexual health, wellness etc. These additional services provide a compelling up-sell opportunity for the company to its already significant subscriber base especially mental health and wellness services which are gaining increasing awareness in North America. In recent months, TDOC has entered into the virtual consultation space for hospitals by acquiring InTouch Health (to be discussed later in the article). Furthermore, the company has been expanding its global footprint with presence across several different countries.

Source: TDOC investor presentation

Updates Since Last Article

Q3-2019 Earnings Release

The company released its Q3 results October and we believe this has been the main catalyst for the aggressive stock price increase since. The key stat here was the significant increase in subscriber base to 35M (from 27M in Q2 2019). YoY, this constitutes an increase of 55% and really exhibits the leadership position of TDOC in this market. The growth was driven by continued increase in notable insurance plan clients (e.g UNH) and increases in the behavioral health business as adoption of mental health and wellness increases across North America. Revenue growth beat analyst consensus and the company increased its guidance for Q4 2019. Management indicated that RFP volume is up 25% YoY and bookings are up 30%, which should translate into strong organic growth in 2020. Management remains confident in the 20-30% long-term organic growth targets which is a very positive sign for investors.

Quarterly revenue and adj. EBITDA trends. Note that our adj. EBITDA calculation only excludes stock compensation and does not take into account other adjustments that the company includes in its own calculations (Source: company disclosures)

Acquisition of InTouch Health

In January, TDOC acquired InTouch Health, a provider of enterprise telehealth solutions for hospitals and health systems, for $600M. The deal was valued at 7.5x TTM revenue which is well below TDOC’s current valuation of ~15x revenue. The deal consideration included $450M of TDOC’s stock which shows the seller’s confidence in TDOC’s business and the company’s use of a high valuation to invest it the business. InTouch’s platform allows hospitals to provide specialist coverage in smaller communities for specialties like cardiology and critical care. This helps smaller hospitals reduce overheads by leveraging virtual consultations. TDOC’s current offering helps hospitals provide virtual access to outpatient visits (ex: pre-admission, post-discharge) and is synergistic to InTouch. This acquisition further expands TDOC’s set of products that it can cross sell to its established base.

Growth Vectors

  • Capture unpenetrated commercial insurance market – Despite the aggressive adoption of telehealth, only ~25% – 30% of the US population covered by commercial health insurance is currently subscribed to telemedicine services leaving a fairly large untapped market to grow into.
  • Higher use by existing subscribers – The use of telehealth is becoming more popular as patients look to save time and the health ecosystem looks for ways to cut costs. Higher use by subscribers leads to higher revenues for TDOC.
  • Add new services to the platform – The company has continuously added new services to the platform such as mental health and wellness and now hospital specialist capabilities via InTouch. This again leads to higher utilization of the platform along with a higher per employee per month (PEPM) rate.
  • New Market (Medicare Advantage) – Medicare is expected to cover telemedicine services starting in 2020 and this could open up a significant new market for TDOC (20 million potential users).
  • New Market (International expansion) – Adoption of telehealth in international markets is much lower than the US and TDOC has started to expand its footprint outside North America.
  • License software – There will likely be physician offices that can utilize the software to reduce costs and provide convenience to their customers, without the need for the physician network available via TDOC. For example, a high-touch family practice may want to provide its regular customers access to telemedicine to generate additional revenue. These physicians would pay a licensing fee to the telemedicine company providing the software.
  • Industry Consolidation (M&A) – As adoption increases, we will see more consolidation in the telemedicine market which should provide TDOC another avenue for expansion. Acquisition of InTouch is a prime example of this.

Valuation

Despite our optimism on the business side, the significant increase in the stock price makes us a bit cautious at today’s valuation. We have updated our forecast for the business below which now shows more aggressive increase to subscriber base and higher increase to PEPM as new services are added. We have kept EBITDA margins consistent as our previous article however note that this is likely an aggressive assumption given that advertising and market spend will likely increase as the company looks to expand. Overall, we think the forecast below is fairly aggressive and value investors should be cautious.

What does this mean in terms of market adoption?

Essentially, over the next 5 years adoption would have to increase significantly for this valuation model to come to fruition. While this is an aggressive assumption, we note that our forecast may not fully take into account cross selling opportunities into the established customer base which could provide additional upside

Risks

  • Increased competition from new entrants could temporarily hinder growth and apply downward pressure on pricing
  • Increasing physician shortage leading to higher cost of revenue
  • Regulatory changes leading to cuts in reimbursement rates
  • Change in regulations resulting in restrictions upon cross state physicians treating patients; this will impact ability to scale profitably
  • General market downturn stemming from fears of a global recession

Conclusion

TDOC has exhibited very strong growth on the backs of industry tailwinds and development of new services. The company has many growth vectors at its disposal however today’s valuation make us a bit cautious. We recommend value investors to monitor from the sidelines for now.

Source: Teladoc: Growth Prospects Still Intact, But Upside Limited On Valuation – Teladoc Health, Inc. (NYSE:TDOC) | Seeking Alpha