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Teladoc Health, Inc. (NYSE:TDOC) is sinking towards multi-year lows despite the virtual care company reporting strong adjusted profits. The stock market convinced companies to focus on profits and now the fear is the lack of revenue growth. My investment thesis is ultra-Bullish on Teladoc Health, but the telemedicine provider needs to return to focusing on profitable revenue growth.
Source: Finviz
Soaring Profits Aren’t Enough
Teladoc Health was one of the biggest beneficiaries of Covid-19 shutdowns. Patients were encouraged, and sometimes forced, to seek virtual care options to avoid the spread of the virus.
The telemedicine health company has seen demand pull forward in 2020 and 2021 reducing the growth rates in 2023. In the process, management has shifted the company to focusing more on profits due to the market mantra that only profitable growth is acceptable.
Teladoc Health just reported a Q3 where adjusted EBITDA soared 73% to $89 million. The company slightly missed revenue estimates and only grew total revenues by 8% to $660 million.
Source: Seeking Alpha
The results is a stock trading at levels not seen since way back in 2016. Teladoc Health traded at nearly $300 when sales growth topped 100% in the early days of Covid.
The problem is that the market doesn’t actually want maximum adjusted profits when the company is reporting decelerating growth. Teladoc Health reported Q3 ’23 revenue only grew 8%, and the forecast for Q4 is such a wide range as to not provide much confidence.
The other issue is that a lot of investors don’t care about adjusted profits regardless of the logic of using such numbers. Technically, Teladoc Health reported a GAAP loss of $57 million, so a lot of investors just write off the soaring adjusted EBITDA profits.
Source: Teladoc Health Q3’23 earnings release
The reality is that the company reported positive operating cash flows of $106 million. Any investor should automatically question whether the GAAP numbers are all that useful with cash generation being king.
As the adjusted EBITDA table above highlights, Teladoc Health reported a massive $94 million in deprecation and amortization charges. The company doesn’t have a capital intensive business and only spent $38 million on capital expenditures and capitalized software in the quarter suggesting the majority of those reported losses are from amortization. Naturally, once checking the 10-Q, the amortization charges are quickly verified as $73 million in the prior quarter.
In addition, Teladoc Health takes $6 million in acquisition integration charges and, more importantly, $53 million worth of stock-based compensation (“SBC”). Regardless of how one views this charge, SBC is a non-cash charge and a prime reason why the company is now a cash machine.
The Q4 ’23 revenue guidance of only $658 to $683 million might disappoint the market, but Teladoc Health is again guiding to a massive jump in adjusted EBITDA. The forecast for the quarter is $112 million leading to $325 million in adjusted EBITDA for the year.
Amazingly, the stock now trades far below 10x the adjusted EBITDA for the year that ends in just 2 months. As highlighted above, Teladoc Health shifting to a focus on profits hasn’t helped the stock.
Unwarranted Operational Review
In addition, management announced an operational review, with CEO Jason Gorevic making the following statement in the Q3 ’23 earnings report (emphasis added):
We will accelerate our efforts to drive value through improved business performance across the enterprise, undertaking a comprehensive operational review of the business to further improve our efficiency. We are committed to building an even stronger company that continues to deliver on balanced growth, while keeping our promises to clients and caring for our members.
In essence, the company appears to be doubling down on improving EBITDA profits while the market is fearful of Amazon (AMZN) taking over the virtual care business. The online retail giant just launched Amazon Clinic, and an operational review might suggest the threat is far bigger than thought.
Teladoc Health definitely needs to focus on balanced growth. The company can’t grow at all costs, but the telemedicine provider needs to build a dominant business that won’t succumb to the threat of Amazon by investing in the future.
The Q3 ’23 results were even better under the surface, with the growth shifted back to the Integrated Care segment from the mental health business. BetterHelp is too reliant on online advertising to acquire customers, and doesn’t appear to have a sustainable market position.
Source: Teladoc Health Q3’23 presentation 
Takeaway
The key investor takeaway is that Teladoc Health now has the profits and cash flows the market claimed so important to make a stock worthwhile to own, but nobody is investing due to the lower growth and Amazon fears. The virtual care provider needs to lean back into growth in order to see the stock rise.
Investors should understand that Teladoc Health, Inc. stock is exceptionally cheap, but the company needs to shift back to focusing on more growth and move away from operational efficiency mantra. The market has scammed Teladoc Health into focusing on higher profits, and the end result has only been a lower stock price.
