Down 87%, Could Teladoc Health Stock Actually Be A Buy?

The simple story is that TDOC was a classic “pandemic winner.” Investors were overly optimistic about the long-term effect of the pandemic on virtual healthcare and, thus, overly optimistic toward Teladoc stock. And so, the TDOC chart doesn’t look terribly different from those of other pandemic winners, like Zoom Video Communications (NASDAQ:ZM) and Peloton Interactive (NASDAQ:PTON).

The simple bull case would be that, while the gains in 2021 went too far, the sell-off in 2022 has done the same. TDOC not only has given back its 2020-2021 gains, but incredibly, it’s now down 56% from where it traded at the beginning of 2020 before the effects of the novel coronavirus pandemic became clear.

In fact, on its first day of trading in July 2015, Teladoc Health stock closed at $28. Shares since have gained 32% total or about 4% annualized.

Yet, it’s not as if Teladoc has been a failure. In 2015, the company generated $77 million in revenue . Guidance for this year suggests the figure should increase to about $2.4 billion.

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That kind of growth combined with a relatively flat stock price would seem to create an opportunity. But there is one big catch here: last year’s acquisition of Livongo Health (NASDAQ:LVGO). The deal cost Teladoc $18.5 billion, mostly in stock. Livongo shareholders received some 69 million Teladoc shares.

Indeed, when Teladoc went public in 2015, there were about 36 million shares outstanding; the figure now is about 160 million. Teladoc has added debt as well.

And so, Teladoc’s enterprise value (defined as market capitalization plus net debt) had ballooned from $825 million at the time of the IPO to a current ~$7 billion. To some extent, the higher revenue has been priced in. Admittedly, the EV/revenue multiple has compressed over time, but it should: Teladoc isn’t growing nearly as fast as it was seven years ago.

Simply put, the Livongo deal is one of the worst of the last decade. Again, Teladoc gave up $18.5 billion in consideration — and still about $4 billion worth at the current TDOC stock price — for a business that, were it still independent, almost certainly would be worth less than $2 billion.

The post-pandemic return to normalcy has impacted TDOC stock. So has sharply slowed growth. But the Livongo acquisition too is a huge factor. Teladoc destroyed billions of dollars in value.

But again, that’s all in the past. What matters in investing is the future.

And Teladoc’s future still seems reasonably bright. Telehealth might not be the massive trend bulls hoped for. Teladoc itself, when the Livongo deal was announced, said the merger would “fundamentally change how people access and experience healthcare.”

But virtual care still will be a key part of the healthcare industry. Teladoc remains the industry leader. Revenue this year, as noted, should come in at around $2.4 billion. There’s plenty of room to grow further, both in the U.S. and international markets, the latter of which only drive about 13% of total revenue.

The Primary 360 offering through Aetna is a “bright spot,” as management put it on the second quarter earnings call. The program is driving primary care visits from patients who often haven’t seen a doctor in quite a while and, thus, potentially driving not only higher revenue but better mid- to long-term health outcomes.

The BetterHelp mental health offering looks particularly intriguing. Revenue grew more than 40% year-over-year in the second quarter (again, according to the earnings call). Teladoc is clearly the dominant player in the space; BetterHelp should near $1 billion in revenue this year. Smaller rival Talkspace (NASDAQ:TALK) will barely clear $100 million, yet that company reportedly has been the target of at least two potential acquisition offers .

There’s still a lot of growth likely on the way here. Yet, on an enterprise basis, TDOC trades at a little under 3x this year’s revenue. Given reasonably high gross margins — 68% over the past four quarters — that’s not an unreasonable multiple. At the least, it’s a multiple Teladoc can grow into.

Yet, it’s difficult to see that case as compelling, particularly after a couple of quarterly earnings reports that clearly disappointed. One big problem here is profitability.

As reported, TDOC perhaps doesn’t seem that cheap. The company’s guidance for this year suggests adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $240 million to $265 million with management, after Q2, pointing investors to the lower end of the range. Using that figure, TDOC trades at a reasonable, if not quite spectacular, 29x EBITDA.

But that figure is inflated in two ways. First, Teladoc excludes stock-based compensation, which is material: it totaled $111 million through the first six months of the year. Stock-based comp is a real expense, as it dilutes shareholders; add that back, and EBITDA for the year is barely positive.

There’s another layer to consider. Teladoc capitalizes its software development costs and then amortizes those costs over time. This is completely acceptable from an accounting standpoint — but the result is that those costs wind up being excluded entirely from EBITDA calculations.

Those costs, too, are substantial, totaling $69 million through the first half of this year. And so adjusted EBITDA, when properly accounting for development costs and stock-based comp, now looks to be coming in around negative $100 million this year, instead of the headline profit of $240 million.

It’s a long way from negative $100 million to the $200-million-plus (at least) Teladoc needs to support the current stock price. That’s particularly true because profit margins are moving in the wrong direction, even by Teladoc’s own measure.

This doesn’t seem like a market willing to stay patient with a company that isn’t yet profitable. That’s doubly true given the decelerating revenue growth. Teladoc probably needs to show something soon or another leg down might follow.

Still, from a long-term standpoint at the least TDOC can’t be written off. There’s an opportunity here. Teladoc simply needs to take advantage of it.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.