Tuesday, April 21, 2020

An @MarquetteAIM Small Cap holding: Teladoc Health, Inc (TDOC, $157.33): “Is Recent Outperformance TELLing Us it’s Time to Sell? ” by: Nick Shotkoski, AIM student at Marquette University

Teladoc Health, Inc (TDOC, $157.33): “Is Recent Outperformance TELLing Us it’s Time to Sell? ”
By: Nick Shotkoski, AIM Student at Marquette University

Teladoc about Machine Learning – Technology and Operations Management

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Teladoc Health, Inc. (NYSE:TDOC) provides virtual care technology solutions to hospitals and health systems allowing for mobile access to physicians for a wide range of conditions varying from mild infections to more severe conditions such as cancer.
• In light of the recent Covid-19 outbreak, Teladoc’s technology is garnering a great deal of interest due to its ability to help play a role in preventing the spread of the disease by allowing patients with less severe symptoms to receive treatment without unnecessary trips to the hospital.
• Teladoc’s technology also helps to free up capacity in the health system by allowing patients to receive medical care from their home instead of unnecessarily taking up capacity at a hospital.
•Due to this potential in facilitating social distancing, Teladoc’s stock is up an impressive 87.92% year to date, noticeably outperforming the broader market.
• While this Covid-19 outbreak shows the immense potential of Teladoc’s products, the company still has yet to turn a profit and trades at a Price/Sales multiple around 20x, hinting it may be a good time to trim the position.

Key points:  
The recent Covid-19 crisis has been a defining event for Teladoc. Teladoc’s telehealth platform has become extremely valuable due to its ability to allow physicians to meet with patients from within the comfort of their homes. This prevents the spread of the virus by allowing patients and physicians to avoid unnecessary contact in the high density environment of a hospital. This also frees up capacity in the healthcare system by allowing physicians to meet with patients and not have to use protective masks and other medical supplies that are in critical demand at the moment.

The utility of Teladoc’s products in this crisis is beginning to flow through to the company’s financial performance. Since the beginning of March, Teladoc has seen daily medical visits on its platform double to more than 20,000 per day. As a result, the company was also able to raise guidance from 170 million to over 180 million for the first quarter 2020. Of this rapid growth in users, the company stated that 60% is due to new user growth. This places Teladoc in a position to capitalize on a growing customer base well beyond the Covid-19 crisis if they can retain some of these new customers going forward. Clearly, the company has a great product that is well suited for the current health crisis.

Wall Street and investors across the country have taken notice in the company’s potential to see a surge in growth as a result of the Covid-19 outbreak. The stock began the year trading at $83.72 and has risen all the way to $157.33 as of yesterday’s close. In this time frame, the company’s Price to Sales ratio has ballooned from ~11x to more than 20x last twelve month sales. And while the company has seen sales grow at an enticing 66.3% CAGR over the past five years, it has never turned an operating profit for a single quarter and is not projected to have positive EPS until 2023.  

The company will need to find a way to retain customers and medical visit volume beyond the current healthcare crisis. While physicians and patients have flocked to the company out of necessity, this may not be the case once the current health crisis passes and stay at home orders are lifted. It is simply too soon to definitively say whether or not this unprecedented growth can be retained beyond the crisis. If the company is unable to capture the growing number of users beyond the Covid-19 scare, it is difficult to justify these valuation multiples given the company’s lack of profitability.

What has the stock done lately?
Since the beginning of March, Teladoc’s stock is up an impressive 26.38%. The stock briefly traded above $170.00 in late March but has since settled around the $150-160 range. This high performance has been paired with high trading volume as well.  This performance is primarily due to increased daily medical visits on the company’s platform leading to higher expected revenue in the current quarter and near future.

Past Year Performance:
TDOC has increased in price by 191.19% over the past year, well surpassing the returns of the broader market. This is primarily driven by increased adoption of the company’s platform and solid revenue growth of 32.4% for 2019.

1 Year Stock Chart vs. Benchmark from FactSet
Source: Factset

My Takeaway
It is undeniable that Teladoc has a great product that is well positioned to aid the fight to flatten the curve and spread of the Coronavirus. However, at a current valuation multiple of 20x last twelve months sales, I believe the current stock price is a little too frothy. The company has turned into a ‘show-me’ story and must prove that they can obtain profitability and retain customers beyond the current unprecedented times. For these reasons, I think it is time to take some profits off the table and trim the position.
1 Month Stock Chart from FactSet here

Source: FactSet