Teladoc Health’s Post-Pandemic Positioning

(Postmodern Studio)
(Postmodern Studio)
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Teladoc Health (TDOC) is down over 30% YTD and down nearly 55% from its peak. Today, we look at the telehealth and virtual healthcare giant to see how its positioned for the post-pandemic era and its relative valuation.

Overview

  • Teladoc Health (TDOC) is a provider of virtual healthcare services.
  • The company provides a portfolio of services and solutions including various medical subspecialties from non-urgent, episodic needs, like flu and upper respiratory infections, to chronic, complicated medical conditions, like hypertension, cancer, and congestive heart failure.
  • Teladoc believes that telehealth macro trends were accelerated by the impacts of the global pandemic as it drove more consumer trial and use of virtual care.
  • TDOC’s clients consists of employers, including over 50% of the Fortune 500, health plans, health systems, and insurance and financial services companies.
  • The company completed over 10.6 million telehealth visits in 2020.
  • In the company’s most recent news (October 6), Teladoc announced its primary care service, Primary360, is now available to commercial health plans, employers, and other organizations that sponsor health care. This service sets customers up with a dedicated physician and care team, virtually.

Important Acquisitions

Teladoc made two important acquisitions in 2020. The acquisition of InTouch and the major acquisition of Livongo Health.

  • On July 1, 2020, the acquisition of InTouch was completed for just over $1 billion in a mostly-stock deal. InTouch was a leading provider of enterprise telehealth solutions for hospitals and health systems.
  • The biggest deal, though, was the merger with Livongo Health which closed on October 30, 2020. Each share of Livongo common stock was converted to 0.5920 shares of Teladoc common stock and $4.24 in cash. Total consideration of the deal was just under $13.9 billion.
    • Livongo Health was a leader in digital chronic condition management solutions for employers and health plans. The merger positioned the combined company to offer integrated, comprehensive Whole Person solutions to members.
    • At the time of the merger, Livongo was growing at over 100% YoY. It grew over 100% YoY in every quarter from the time it went public in July of 2019.
    • According to analyst estimates, Livongo (LVGO) was on pace for $378 million in FY20 revenue (ending December 31) and $554 million in FY21 revenue with ~75% gross profit margins. That means Teladoc acquired Livongo at around 36x forward gross profit, ex synergies.

Q2 Earnings Highlights

As a reminder, Teladoc reports third-quarter earnings on Wednesday, October 27. Make sure to follow Morning Cents to get an update after earnings are released.

  • In its most recent quarter, TDOC reported revenue growth of 109% YoY for a total of $503 million.
  • Over 92% of revenue came from U.S.-based customers.
    • Adjusted EBITDA grew to $66.8 million (154% growth, 13% margin)
  • Announced a collaboration with Microsoft to integrate Teladoc’s Solo platform for health systems into Microsoft Teams.
  • Launched myStrength Complete, integrating capabilities across Teladoc and Livongo to deliver a comprehensive mental health program for consumers through their health plan or employer.

Guidance

  • TDOC raised full-year revenue guidance to over $2 billion.
  • The company maintained adjusted EBITDA guidance for the quarter and full-year.
  • Investors were generally spooked by Teladoc’s slow growth in paid memberships last quarter. This quarter they expect paid memberships to grow 1%-3%, but total visits to be up over 20% YoY.
    • Leading into Q3 earnings, these figures along with revenue growth, free cash flow, Livongo integration updates, and forward guidance will be important to monitor for investors.

Valuation

  • At $139.76 per share, TDOC is trading at a $22.3 billion market cap.
  • With $438 million in net debt, the company is trading close to a $22.7 billion enterprise value.
  • Analyst estimates have Teladoc reaching the the midpoint of guided revenue for FY21 and continuing to grow over 25% over the next two years. At it’s current price, TDOC is trading ~9x forward sales and 13.5x forward gross profit.
  • On an adjusted EBITDA basis, TDOC is trading at ~61x forward adjusted EBITDA. It is important to note that $169 million of Teladoc’s $123 million in first-half adjusted EBITDA is from a stock-based comp adjustment.

JO: From an outsider’s perspective, TDOC seems to be a good business with sticky healthcare B2B software economics. But I have heard counterarguments about how TDOC’s software isn’t great and could get displaced as well. I don’t have an opinion either way, although I lean towards the belief that incumbents like TDOC have a huge advantage due to the risk aversion of healthcare systems and providers.

From a valuation perspective, if…

  • Growth slows to below 30% per year, but the the company grows to $9.2B in revenue by 2030
  • EBITDA margins increase to 29%
  • We use a 10% discount rate and 3.5% perpetuity growth rate after 2030

… then a DCF would suggest that the company is fairly valued ~$130 per share. Because we don’t have the capacity to do deep channel checks into hospitals and find a differing view, this is our stance on the stock as well, at least for now.

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