Teladoc Health, Inc. (TDOC, $60.75):
“TeleProblems on the Horizon?”
By: Chez Daggs, AIM Student at
Marquette University
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.
Summary:
● Teladoc Health, Inc. (NYSE: TDOC) is the largest telehealth company
in the world offering virtual healthcare services to its customers. TDOC
provides members with care and expertise from a portfolio of services and
solutions for over 450 medical subspecialties. The company has a large network
of physicians and other healthcare professionals in over 20 different languages
in more than 125 countries, including the United States. As of their Q2 filing,
TDOC had approximately 26.8 million paid members on their platform. Teladoc was
founded in 2002 and is headquartered in Purchase, New York.
● Despite
shares getting bounced around in the market, TDOC’s business continues to
perform better than expected, as shown by their recent Q2 earnings.
● Amazon
announces their entrance into telehealth, this could potentially mean trouble
ahead.
● TDOC’s
BetterHelp business proves to be an innovative idea, keeping the company ahead
of the game.
Key points:
TDOC was added into the portfolio last spring at around $61
a share and over the past 7 months has dropped as much as -16% from purchase to
rising as much as +18% from purchase. Part of that negative run was due to a
short report being released about the company’s relationship with Health
Insurance Innovations (HIIQ). The report basically claimed that nearly 70% of
TDOC’s revenues come from HIIQ. Multiple firms spoke with TDOC’s management to
confirm the details of the accusations and it turns out that HIIQ is only a
small contributor to TDOC’s overall revenues. The short report may have
overestimated the amount of HIIQ’s contribution. They report their Q3 earnings
later this October and may have to shed a little more light on this topic, but
other than that I expect them to have another solid quarter being in line, or
even beating on the top and bottom. I attribute this to the fact that telehealth
companies still have not really penetrated the telehealth market. TDOC
estimates there is still a total addressable market of about $57 billion. To
give a brief recap of their Q2 earnings, TDOC had great results with revenues
coming in above expectations, along with adjusted EBITDA. This was driven by
membership visits hitting above expectations and overall strong organic growth.
EPS was in line, but membership growth QoQ was lower than expected.
TDOC may be dealing with increased competition in the future
as Amazon.com, Inc. (NASDAQ: AMZN) announced recently that they will be
entering the telehealth space. They will pilot the program for their employees
in Seattle and will offer health services through telemedicine as well as
in-person care at home or the office through a mobile nurse. Amazon Care will
also provide the option for prescription medicines to be delivered to the home.
My assumption is if the program is deemed successful they will expand Amazon
Care beyond its employees. TDOC’s price took a slight hit before rebounding,
showing the market sees this move as a potential threat to TDOC. Typically when Amazon enters a new market
they shake up the industry and take out some of the players in its way. TDOC
will be a bit different though considering they are a leader in telehealth
already, and is also a disruptor themselves. TDOC has grown rapidly over the
past 3-4 years with YoY revenue growth never coming in at less than 50%, and
they are not expected to slow down any time soon. Since Amazon Care is starting
off on a small scale, TDOC still has plenty of time to stay ahead of the curve.
One way in which they are staying ahead of the curve is
through the growth of their BetterHelp business (around 15-20% of revenues),
which offers diagnosis and treatment of behavioral health conditions. BetterHelp
was announced in spring 2018 as a part of a strategic acquisition to grow the
business. Behavioral health issues include stress/anxiety, depression, abuse,
and more. Management stated in their recent earnings call that they expect the
BetterHelp business to grow by another 50% in FY19. The majority of members
meeting with these experienced psychiatrists, psychologists, therapists, and
social workers are text based, but management is seeing more growth through
voice and video. The National Alliance on Mental Illness state that about 1 in
5 U.S. adults experience mental illness each year, and suicide is the 2nd
leading cause of death among people aged 10-34. TDOC has a great opportunity to
help millions of members globally if they continue to focus their efforts on
BetterHelp.
What has the stock done lately?
As stated earlier, TDOC’s price has had a very rocky 2019
thus far. FactSet currently has their 5-year raw beta at 1.56, therefore, all
of the huge swings we’ve seen this past year has not been well for TDOC’s
stock. Over the past month, the stock is up to around $61 a share after
climbing back from a 3 month low of about $55 a share. When compared to the
Russell 2000, the AIM small cap benchmark, TDOC has outperformed the Russell
over the past month up 9% vs. 0.5% for the Russell.
1 Month Stock Chart
Source: FactSet
Past Year Performance:
Over the past year (October 2018 - October 2019), TDOC
shares hit an all-time high of $85 before tumbling down ~30%. And as stated
earlier, TDOC shares have dropped ~16% from purchase. Their stock price
continues to struggle with breaking past their resistance line at ~$70 a share,
and consistently bounces off their support at ~$50 to $55 a share. The stock is
currently trading at an EV/Sales multiple of 8.92x which is a tad bit under
their 3-year average of 11.10x. Therefore, there is still room for upside in
the horizon.
1 Year Stock Chart vs. Benchmark
Source: FactSet
My Takeaway:
TDOC should continue to stay in the AIM small cap portfolio
as the market opportunity for telehealth continues to expand. We should ignore
these short-term distractions as there is still a lot of alpha to be generated
from this holding. TDOC has established themselves as a leader and the company
has positioned themselves well in this industry. There is a significant
opportunity for continued strong revenue growth if they continue to focus on
their BetterHelp business and stick with their strategic move of growing mostly
organically. Amazon announcing that they too will enter this market definitely
sends a message to those competing in this area, so it will be interesting to
see how that story plays out.
