Teladoc ($TDOC) was one of the most volatile stocks in the last few years. The share price increased 10x from $33 (5 years ago) to almost $300 at the peak of Feb 2021. Since then, the price declined by 90% and is now back in the $30s.
I've spoken with quite some retail investors and it's so interesting to see the two opposing views. Some are very optimistic about Teladoc and expect the price will go back to the all-time highs. While others are expecting the price to go below $10 and are short-selling the stock.
The goal of this post is to share my fundamental analysis and valuation. Feel free to provide your feedback, add your own insights, and disagree with me 🙂
It is good to mention that the market cap is $5b, we can keep this number in mind when comparing it to other parts of the financials later on. Let's get started!
What is Teladoc?
Teladoc is a global leader in whole personal virtual care. It is challenging the traditional model for hospital visits for non-urgent mattes and provides a new, more convenient alternative, that is available 24/7. It has been referred to as Uber for doctors. Patients can use the Teladoc platform to schedule online visits and connect with the right healthcare professional, whether that's related to acute care, specialty care, mental health, or wellness & prevention (including prescription). Teladoc stores a significant amount of data regarding the patients that can be analyzed using AI and provide meaningful insights that can easily be used.
Related to the service provided through the platform, 92% of all issues are solved in 1 virtual visit and 1% are being referred to emergency care. This means the platform does a good job of connecting the patient with the right healthcare professional.
How does Teladoc make money?
Teladoc has two main revenue sources:
- Access (subscription) fees – In the majority of the cases, employers pay this fee on behalf of their employees ($14.99/month or $99/annually). This is roughly 85% of the revenue, which makes Teladoc mainly a B2B company. This is a subscription that allows the employees to access the platform and schedule virtual visits/appointments on their own. Hence, this is a pretty high-margin revenue.
- Visit fees – Although the majority of the payment for the virtual visits goes from the patient to the doctor, Teladoc keeps a small % of it as a “visit fee”. This is a lower-margin revenue and it represents the remaining portion of Teladoc's revenue.
How does Teladoc grow?
If we take into account the revenue sources, it is clear that Teladoc grows in two ways:
- Provide access to more members and hence increase the access fees. – Teladoc has almost 55m paid members in the US and it can be argued that the US market is already highly penetrated with limited growth ahead. Of course, internationally, there's still room to grow, but there are plenty of other competitors as well and the rates are likely to be much lower than in the US.
- Increase the # of visits which leads to higher visit fees. – The company publishes a so-called utilization rate, which is calculated as the # of visits divided by the # of members. This rate has increased from 17.5% in Q1/2021 to 23.4% in Q1/2022. Roughly 1/5 of the members use the platform and schedule meetings. I find this a bit difficult to increase significantly. The nature of the service doesn't allow the company to upsell/cross-sell, with the exception of the nutrition/wellness segment. However, that very segment is highly competitive in the first place and there are cheaper alternatives.
Livongo – the elephant in the room
Historically, the growth has come from a combination of organic growth and acquisitions. In 2020, Teladoc acquired Livongo and the purchase price was $13.9b (net of cash received). The fair value of the balance sheet of Livongo was roughly $1b, which lead to goodwill recognition of a staggering $12.9b. Of course, the majority of that purchase price was in the form of stock and at the acquisition point, both Teladoc and Livongo were significantly overvalued. However, let's not forget that the market cap of Teladoc today (including Livongo) is $5b, a lot less than the acquisition of Livongo on its own.
Livongo is also a company that operates in the industry, providing a device that allows the patients to measure certain important aspects on their own. They're mainly focused on diabetes management/prevention, high blood pressure, and weight management.
Fast forward to Q1/2022, Teladoc reported a goodwill impairment of $6.6b, roughly 50% of the goodwill initially recognized.
Why was the goodwill impairment and what does this mean?
Every company has to do so-called goodwill impairment testing annually. In a nutshell, the company needs to forecast the future cash flows that are expected to be generated from the acquisition, discount it to today and compare it with what they have on the balance sheet (including the goodwill). If the outcome is higher than what the company has on the balance sheet, then nothing happens. But if the outcome is lower, they need to impair the goodwill.
This impairment means that Teladoc forecasted the future cash flows and discounted them to today and the outcome was $6.6b lower than what they expected at the point of acquisition.
What is interesting is that there's still over $6b of goodwill related to Livongo only, so Teladoc still believes that Livongo is worth over $6b. The market disagrees significantly as it prices the entire company lower than what Teladoc is valuing Livongo alone.
Goodwill impairment is a non-cash expense, so although it is in the P&L, it has no significant impact on the company's financials. However, it does raise two of the main risks when it comes to making big acquisitions:
- Selecting the right company that will create synergy.
- Integrating the acquired company into the existing environment.
Historical financial performance
If we take a look at the revenue growth, it increased from $233m for the full-year 2017 to $2.1b for the last twelve months (ending Q1/2022). Although it is impressive annual growth, a lot of that came from the acquisitions. The organic growth was close to 40% CAGR. The expected growth for 2022 is close to 20%, which shows that the growth is quite limited ahead (at least organically).
The gross margin is currently around 68% and depending on which revenue source contributes more, it could fluctuate in both directions. The main direct costs that are being incurred are fees paid to doctors, data center activities, and client support.
Operating expenses:
– Sales & Marketing – As % of revenue, it has decreased from 41% (in 2021) to 33% (LTM). That is roughly $700m and it can be argued that it might not be producing high RoI based on the revenue growth.
– Technology & Development – Stable at 15% of revenue
– General & Administrative – Significantly decreased from 34% (in 2021) to 20% of revenue (LTM)
– Depreciation & Amortization – Increased from 8.2% (in 2021) to 10% (LTM)
The operating margin has improved from -32% (in 2021) to -12% (LTM, excluding the $6.6b goodwill impairment).
Liquidity
Although the company's operating margin is negative, part of the costs are paid via share-based compensation, so the company's operating cash flow seems positive as this is a non-cash expense. However, this of course leads to dilution of shares. It is worth mentioning that it does help when it comes to the short/mid-term liquidity challenges in this environment and reduces the risk of bankruptcy.
The balance sheet
The goodwill remaining on the balance sheet arising from all historical acquisitions ($7.9b), together with the other intangible assets ($1.9b), and the cash ($0.8b) comprises 96% of Teladoc's balance sheet ($11.1b).
On the liability side, the most important topic worth mentioning is the long-term debt and leases, amounting to $1.6b (2x the cash the company has available).
The company is capital-light, so the focus should be mainly on the $0.8m cash and $1.6b debt.
The valuation
I used a DCF model to estimate the company's value. The assumptions are listed below:
Revenue growth: 20% in the next 12 months, followed by 15% in the 4 years after that and declining growth over time to 3.41% in 10 years' time. This is in line with analysts' expectations for the next 2 years as well as the management's guidance.
Operating margin: to improve over time, to reach 9% in year 5 and 25% in year 10.
Discount rate: Currently 7%, increasing to 10.6% over time (as the fed is raising the interest rate)
Outcome: $38.77/share
*Note: In the DCF calculation, the outstanding equity options are also taken into account as well as the deferred tax that they can use to reduce their future tax payments.
What if my assumptions are significantly wrong?
Based on my assumptions above, the revenue will grow by 208% to $6.6b in the next 10 years and the target operating margin is 25%.
Let's take a look at how the valuation of the company (per share) changes based on different assumptions related to the revenue 10 years from now and the operating margin:
| Revenue / Op. margin | 20% | 25% | 30% |
|---|---|---|---|
| 150% ($5.4b) | $21.9 | $31.0 | $40.1 |
| 208% ($6.6b) | $27.8 | $38.8 | $49.8 |
| 300% ($8.6b) | $37.3 | $51.3 | $65.3 |
| 350% ($9.6b) | $42.5 | $58.1 | $73.8 |
There is still quite some uncertainty ahead of Teladoc and it is clear that the level of success depends on the # of new members they can bring to their platform as well as the utilization rate. Looking into the two opposite views, I'm in the middle. I don't think that Teladoc will go down to $0 as there is a value that the platform is providing and I don't see a bankruptcy risk. However, I don't think that going back to the levels of $300 in the next few years is also reasonable (at least based on the fundamentals).
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