Should Investing in Teladoc Health's Shares be Considered?
Teladoc Health (TDOC) isn't exactly the dream investment for many, seeing as its shares have plummeted a staggering 88% over the last three years. However, it's hard to deny the company's substantial value, stemming from its expansive telehealth platform and extensive subscriber base of approximately 93 million individuals in the U.S.
So, is this a golden opportunity to scoop up shares, or is it a ticking time bomb ready to disappoint investors once again? Let's delve deeper.
Is telehealth still the future's main course?
According to the bullish perspective, Teladoc's path to prosperity lies in the economies of scale it will reap as the leading telehealth provider in the U.S. This, combined with its robust positions in behavioral health and chronic care, deep connections to insurance companies, and vast army of clinicians, should result in a highly efficient operation with an interconnected ecosystem of healthcare services that makes it challenging for patients to switch to competing providers.
In theory, these synergies could offer multiple network advantages, creating a sustainable competitive edge if the company can effectively leverage its own resources.
Unfortunately, 2023 hasn't been a bountiful harvest for Teladoc, and that's a significant concern for its investment thesis. Compared to last year, its third-quarter revenue dipped by 3%, reaching $640.5 million, and its adjusted EBITDA fell by 6% in the same period, landing at $83.3 million.
Its online behavioral health service, BetterHelp, and its most promising growth driver in recent years, is not exactly setting the charts ablaze either, with revenue decreasing by 10% year over year as of the third quarter, hitting $256.8 million.
It's not being suggested that telehealth is on its deathbed. But when one of the industry's giants is reporting lackluster results like these, it's reasonable to question whether the days of telehealth's meteoric growth, sparked by the shift to remote care during the pandemic, are truly behind us.
What remains is the industry's long, arduous journey towards sustainable businesses that generate profits from their telehealth services and the accompanying reimbursements from health insurers and institutional buyers.
And Teladoc has some ground to cover in this regard. Its trailing 12-month selling and marketing expenses amounted to $883.9 million, and it reported operating losses of $196.5 million. Its selling, general, and administrative expenses during this period amounted to an eye-watering 51.3% of its revenue, a proportion that has been steadily declining but still underscores the work the company needs to accomplish to generate meaningful returns for investors.
So, why should we be interested in buying the stock?
In the short term, there seems to be little reason to pile on shares of Teladoc. In the long term, however, it's quite plausible that it will be able to achieve profitability consistently, as there's no concrete evidence to suggest that its business is incapable of becoming more efficient.
Its contracting revenue isn't an indication that competitors are eating away at its market share or that it's doomed to underperform – its subscriber base remains stable. Becoming profitable will hinge on squeezing a bit more revenue from each member while possibly cutting key overhead costs like marketing and claim processing.
This may seem like a distant goal for any given quarter, but it's a realistic set of objectives over a couple of years or more. Additionally, it's worth noting that Teladoc doesn't necessarily need to rush to become profitable – scaling back on non-essential operating expenses like research and development would be sufficient for it to start producing positive operating cash flow right away.
So, do we see a compelling reason to invest in Teladoc today based on its potential for future growth? Yes, but it's not exactly a slam dunk argument. Evaluating its valuation, its EV/R multiple is a mere 0.9. This suggests that the market is skeptical about its ability to generate impressive sales growth or profitability relative to its overall market value, including debt and equity financing.
Considering its latest lackluster performance – and potential for more turbulence – such a low EV/R indicates that the market might be overly pessimistic. Buyers would benefit from the valuation correcting in the future as sentiment improves over time. However, it can't be denied that the bullish thesis for Teladoc has yet to reach fruition, and there are no indications of an imminent turnaround.
In conclusion, if you're willing to take on some risk and stand pat for at least the next few years, Teladoc's valuation is enticing enough to make an investment now. But there's no need to rush – it might be wiser to include Teladoc Health on your watchlist and wait for its performance to reveal signs of improvement before diving in.
Given Teladoc's current financial struggles, some investors might consider this as an opportunity to buy at a discount, with the hope of capitalizing on its potential for future growth in the telehealth industry. Furthermore, investing in Teladoc could also be seen as a way to diversify one's finance portfolio, as the telehealth sector is expected to continue evolving and growing in the coming years.
