Teladoc: Zero Moat – Expect More Volatility Ahead (NYSE:TDOC)

There Is No Moat Around TDOC’s Telemedicine Investment Thesis

We previously covered Teladoc (NYSE:TDOC) in February 2023, discussing how its supposedly blockbuster 2020 Livongo acquisition worth $18.5B had drastically underperformed against the 2015 BetterHelp acquisition worth $4.5M.

The overpriced diabetes/ remote monitoring deal had also resulted in a drastic share dilution, with the management reporting an exorbitant write down worth $17.17B over the past few quarters, naturally disappointing long-term shareholders.

For now, we have been proven right, with TDOC’s BetterHelp recording excellent growth in paying members to 476K in FQ2’23 (+1.9% QoQ/ +16.6% YoY).

This is compared to the gradually maturing growth rate from the US Integrated Care Members of 85.9M (+1.1% QoQ/ +6.9% YoY) and its Chronic Care Program Enrollment of 1.07M (+4.9% QoQ/ +7% YoY).

The BetterHelp segment is also TDOC’s bottom-line driver, with $37.96M of adj EBITDA generated (+115.3% QoQ/ +29.4% YoY) and an adj EBITDA margin of 10.5% (+4.2 points QoQ/ +1.9 YoY) in the latest quarter, comprising 52.6% (-19.2 points QoQ/ -10.1 YoY) of its overall profitability.

Given the deceleration in its overall revenues of $652.4M (+3.6% QoQ/ +10.1% YoY), intensifying competition from other legacy/ new players such as CVS Health (CVS), Walgreens Boots Alliance (WBA), and Amazon (AMZN), and lack of FQ2’23 GAAP EPS profitability at -$0.40 (+4.7% QoQ/ +97.9% YoY), we are uncertain about TDOC’s prospects in the near term.

Despite the peak recessionary fears, the TDOC management also have not reign in costs as how many other tech companies have, with its operating expenses of $520.9M (+3.7% QoQ/ +9.9% YoY) still growing in-line with its top-line growth. This has naturally caused its operating margins to remain underwhelming at -9% (+1 points QoQ/ +1.7 YoY) in the latest quarter.

Furthermore, the telemedicine company reported a sustained expansion in its Stock-Based Compensation [SBC] expenses to $55.73M (+21% QoQ/ +9.2% YoY) at the same time, diluting its long-term shareholders at an annual rate of 2.8%.

Then again, we must highlight that TDOC still boasts sufficient liquidity of $958.7M (+7.8% QoQ/ +8.4% YoY) in FQ2’23, negating the need to take on expensive financing during this time of elevated interest rate environment.

While the company assumed $550M of Livongo’s debts at a fixed rate of 0.875% and $1B Notes at a fixed rate of 1.25% (to finance the acquisition), these will only be due by June 2025 and June 2027, respectively, negating the need to refinance as well.

As a result of its mixed performance thus far, we believe TDOC investors that have continued holding on since its peak stock price of $290.16 to the current levels of $22.04 must also temper their recovery expectations, since we do not expect to see the hyper-pandemic heights anymore.

The stock may eventually continue trading sideways at these levels, barring a highly optimistic reversal.

So, Is TDOC Stock A Buy, Sell, or Hold?

TDOC 5Y EV/Revenue and EV/ EBITDA Valuations

For now, TDOC trades at NTM EV/ Revenues of 1.56x and NTM EV/ EBITDA of 12.90x, drastically moderated compared to its 1Y mean of 1.89x/ 17.27x and pre-pandemic mean of 8.02x/ 115.37x.

However, we believe that this much-needed correction may not be over yet, since the stock still trades above the Health Care Technology mean EV/ EBITDA valuations of 9.51x.

Based on TDOC’s annualized FQ2’23 adj EBITDA of $288.6M (+36.7% QoQ/ +54.4% YoY) and its current share count of 164.17M, we are looking at an annualized EBITDA generation per share of $1.75.

Combined with the sector’s median valuation, we are looking at a fair value of $16.64, suggesting that the stock is currently still trading at a slight premium.

Consensus FY2025 Estimates

Based on the consensus FY2025 adj EBITDA estimates of $393.69M and its historical share growth, we are looking at an adj EBITDA per share of ~$2.26, expanding at a CAGR of +13.64% from current levels.

Assuming that the sector’s mean EV/ EBITDA valuation stays consistent, we believe that the TDOC stock has already pulled forward most of its upside potential to our long-term price target of $21.49.

TDOC 1Y Stock Price

Combined with the TDOC stock’s lower highs and lower lows since November 2022, we believe that there may be more volatility in the short term, especially due to the elevated short interest of 16.96% at the time of writing.

Despite the top-line beat in the recent FQ2’23 earnings call, we have observed profit taking as the stock soared with it also plunging afterwards, thanks to the Amazon Clinic’s nationwide launch.

The latter is a legitimate headwind to TDOC’s prospects indeed, since it implies that the telemedicine provider has no moat, worsened by AMZN’s tremendous liquidity of $63.97B (inline QoQ/ +5.3% YoY) and willingness to spend as witnessed by the $3.9B One Medical deal.

While Amazon Clinic may not accept insurance at the moment, we believe this may change in the near term, since consumers may opt to use insurance to pay for the medications prescribed through the service, with Blue Shield of California already opting to ditch CVS for Amazon Pharmacy.

In addition, Amazon Clinic consumers may also submit a claim to their insurance providers, depending on their reimbursement policies.

These developments may trigger further headwinds to TDOC’s growth in the US, with the country currently comprising 86.1% of its revenues in the latest quarter (+0.1 points QoQ/ -1.9 YoY).

Therefore, due to the reduced margin of safety and TDOC’s mixed prospects, we do not recommend anyone to add here yet, resulting in our Hold (Neutral) rating.

Bottom fishing investors may want to observe the situation a little longer, since we are uncertain if there is a floor to its decline, with the stock already drastically moderated to its 6Y lows, back to March 2017 levels.