Most Covid-19 growth stories have experienced a boom-bust cycle not seen frequently in stock market history. Home-based services such as video conferencing with Zoom Video Communications (ZM, Financial) or video streaming services such as Netflix (NFLX, Financial) saw wide swings in their stock prices as the pandemic faded away. One of the worst swings was Teladoc Health Inc. (TDOC, Financial), a provider of virtual health care services. The stock is down 90% from its pandemic peak.
The company offers a portfolio of services and solutions covering non-urgent, episodic, chronic, and complicated medical condition through remote, video-based treatment and consultation. Some of the programs and services include primary and specialty care telehealth solutions, chronic condition management, expert medical services, mental health solutions and platform and program services.
Founded in 2002, the company currently has a market capitalization of $4.4 billion, which is down from its peak of $44 billion in January 2021.
Business update
In October 2020, Teladoc completed its large acquisition of Livongo, another telehealth company that provides diabetes monitoring and remote monitoring. Teladoc paid $18.5 billion in cash and stock and created a health technology giant at the time when virtual health care was soaring.
Well virtual health care did not soar forever and as the worst of the Covid-19 pandemic began to fade away, consumers returned to in-person doctor visits. The company was forced to take major goodwill impairments in 2022, which totaled $13.4 billion. Critics at the time of the acquisition felt the company was overpaying for Livongo, and it appears those fears came true.
During the recent earnings call, Teladoc Chief Financial Officer Mala Murthy said, "The goodwill impairment charge reflects the overall operating environment, including the lower rate of growth reflected in our guidance today, and overall financial market conditions, including decreased market multiples."
Financial review
For full-year 2022, the company reported an 18% increase in revenue to $2.4 billion. Access fee revenue grew 21% to $2.10 billion and other revenues increased 4% to $303 million. The company reported a massive net loss of $13.7 billion, largely due to the Livongo write-down mentioned above.
The membership base increased to 83.3 million, which was a 7% increase from 77.5 million in the prior year. Average revenue per member decreased 2% to $1.42 from $1.46. This was likely due to increasing price competition in the industry.
Consolidated Ebitda for the year was only $5.6 million as Teladoc is still a money-losing operation in terms of net profits. Even after adding back the $13.4 billion write-off, the company lost $256 million in 2022. Operating cash flow was $189 million and after capital spending of $172 million, free cash flow was slightly positive at $16.5 million.
The company has $918 million cash on the balance sheet and long-term debt of $1.5 billion. During the year, the goodwill balance was reduced to $1 billion from $14.5 billion at the beginning of the year. Shareholders equity plummeted to $2.3 billion from $16 billion at the end of 2021.
In a statement Teladoc CEO Jason Gorevic said, "As we look ahead to 2023, we see a healthy demand for solutions that promise better access and outcomes while lowering the cost of healthcare."
Valuation
The company provided 2023 financial guidance in its latest earnings release, which calls for approximately $2.6 billion in revenue and adjusted Ebitda of $300 million at the midpoint. Net losses per share are expected to be between -$1.75 and -$1.25.
The company does not generate net income, but it should have positive Ebitda this year of approximately $300 million. That puts the enterprise value/Ebitda ratio at roughly 17 to 18 times.
The average price target by the seven analysts that cover the company is $32.30, which would be almost 20% upside from Monday's price level.
Guru trades
Gurus who have purchased Teladoc stock recently include Joel Greenblatt (Trades, Portfolio) and Jeffries Group. Investors who have reduced their positions include Catherine Wood (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Summary
Although the company should still be able to grow revenue at positive rates, the addressable market of remote health care is likely far less than many people thought in 2020. There are many health care services and procedures that require in-person visits and will never be able to be done remotely.
Some possible headwinds the company is facing include growing competition in the telemedicine and chronic care management. Driving paid membership growth can be a challenge in this environment and the company may face additional price competition as well. The company’s 2023 guidance shows a significant slowdown in revenue growth rates to the single-digit level.
Teladoc remains a somewhat risky stock as it needs to generate significantly higher levels of cash flow to support the current market capitalization. Drastic cost cutting may be a necessary fix. I believe it would be prudent for investors to take a wait-and-see approach in order to create a margin of safety.
