Shares of virtual healthcare company Teladoc (New York Stock Exchange: TDOC) came under fire this year as the recent coronavirus (COVID-19) pandemic accelerated the ongoing digital transformation. In this article, we review Teladoc’s business, ongoing growth opportunities, current valuation, risks and safety margins, and conclude with our thoughts on the investment.
Teladoc Health, Inc. provides virtual healthcare services. It covers a wide range of clinical symptoms. The company’s platform provides patients and providers with a unified and smart user experience through mobile, web and phone-based access points. We serve employers, health insurance, medical systems and more.
Teladoc shares performed particularly well this year in light of the coronavirus pandemic. We believe this is accelerating a long-term, large-scale digital transformation (more on this later). We also believe that the most recent sell-off in stock prices (despite a significant rise in TDOC this year) provides an additional margin of safety for investors to consider (although we believe the significant upside is of little concern compared to the possibility of ).
(Image source: iPhone stock app)
Impact of coronavirus
The ongoing coronavirus pandemic has drawn a lot of attention to Teladoc in recent weeks as virtual healthcare solutions are an attractive option for those looking to minimize potential exposure to the virus. For example, the CDC recently encouraged people to use telemedicine services as the coronavirus outbreak escalated. Additionally, just this week, Vice President Mike Pence announced that health insurance companies will pay for telemedicine services during his COVID-19 outbreak. Teladoc’s stock has performed exceptionally well year-to-date as the broader market has plunged.
According to CIO Digital Magazine, “Digital transformation is a fundamental shift in how organizations deliver value to their customers… [it] how the organization uses technology, people and processes to Revolutionize your business performance. It’s basically a huge long-term trend that will greatly benefit organizations that can stay ahead of it, such as Teladoc.And according to a popular blogger Josh BrownFebruary 2020 was a big realization, especially for Teladoc. We agree, as Teladoc (and other digital transformation companies) have soared in their share price, leaving them with so much room in the long run.
Teladoc continues to grow and will likely continue to grow rapidly in the future. This is because it is an industry leader with a lot of room to perform given the vastly expanded market it serves. For a little perspective, let’s take a look at Teladoc’s historical revenue growth and the size of the overall market it can serve.
(Image source: Investor Day Presentation)
Worth mentioning is that Teladoc is experiencing strong revenue growth (both organic and inorganic). For example, his CFO Mala Murthy said in a recent quarterly conference call:
“Total revenues in the fourth quarter were up 27% to $156.5 million. Revenue increased 32% to $553.3 million, or 24% on an organic basis.”
For 2020 (excluding the impact of the recently announced InTouch Health acquisition):
“Full-year 2020 revenue is expected to be in the range of $695 million to $710 million, growing 26% to 28% year over year, again substantially all organic.”
Teladoc is the largest telemedicine business, covering a wide range of physicians, specialties, and consultation services ranging from mental health to general and complex consultations, including niche advice and care. Despite this, they still face competition from a variety of innovative companies, including specialist software and solution providers who offer similar solutions, often at lower prices. Competitors include MDLive, American Well Corporation and Doctor On Demand, all private companies.
Despite TDOC’s rapid revenue growth and patient visits, “operating cash flow” has only recently turned positive and revenue remains negative.
(Image source: Investor Day Presentation)
Also, on a selling price basis, Teladoc has become increasingly expensive in the near term compared to its own history, which is not unreasonable given its long-term growth potential (23 people reporting to FactSet Wall Street analyst assigns 32.5 to TDOC). % long-term growth, and the stock continues to trade below its aggregate price target
It’s worth mentioning that these analysts are notorious for their short-term focus, typically looking a few quarters or years ahead (here’s the analyst’s sales forecast by FactSet). .
But what’s most compelling is Teladoc’s long-term growth potential. And at 9.7 times his price one year ahead in sales, the stock isn’t unreasonable.
Teladoc faces a variety of risks to consider. For example, competitors are expanding their range of services, which could threaten Teladoc’s moat and pricing power. Additionally, the company’s reliance on large contracts and some acquisitions makes revenue generation somewhat inconsistent. In addition, stock prices are volatile, creating downside risks (and buying opportunities). Also, medical policies and regulations are subject to change. For example, a stricter policy on telemedicine could have a negative impact on the industry as a whole. Nevertheless, the strong long-term digital transformation and benefits of telemedicine are compelling.
Teladoc is a rapidly growing company benefiting from an ongoing digital transformation. Shares have been doing well recently as coronavirus concerns shed a positive light on businesses and added acceleration to long-term digital trends. Moreover, the most recent stock price decline provides a small margin of safety. For these reasons, and relative to its long-term growth potential, Teladoc ranks 7th in a recent list of the top 7 growth stocks to benefit as the coronavirus accelerates digital transformation around the world. Longer term, Teladoc stock has significant upside potential, although volatility is likely to continue. If you’re looking for a strong growth stock to add to your carefully diversified portfolio, Teladoc is worth considering.