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Telehealth went mainstream during COVID-19, and Teladoc Health ( TDOC 4.21% ) was a significant winner. Not only did the company experience a surge in revenue growth, but investors saw monster stock gains when shares rose from about $100 in early 2020 to $300 in just over a year.
However, the stock trades at just $65 today. What happened? Lockdowns began easing up, and investors had the impression that Teladoc was a temporary hot stock, coming back to Earth now that patients no longer need telehealth services. But is that true?
Here are three things smart investors know about Teladoc.
Teladoc experienced surging growth during COVID-19 lockdowns in 2020; total visits exploded higher that year, growing 156% year over year, and sending revenue 98% higher to $1.09 billion. The momentum continued in 2021, but a year of 156% growth is a tough act to follow; in that light, 2021’s 38% growth in visits and 86% revenue growth to $2.0 billion still seem impressive.
Image source: Getty Images.
Now, management has said that growth will slow further. Guidance for 2022 implies revenue growth of 25% to 30%. Does this loss of momentum mean that Teladoc needed COVID-19? The company’s results in 2019, the year before the pandemic began, were strong; total visits grew 57% that year, and revenue was 32% higher than in 2018.
In other words, Teladoc is returning to the solid growth rate it had before COVID-19. And don’t forget, the company isn’t giving back its pandemic growth. It’s growing on top of it. The bottom line? The business is doing far better than one might think based on the stock’s 66% fall over the past year.
The company’s negative bottom line is another bone that the market could be picking with Teladoc. You can see that the chart below shows how the bottom line remains negative. The company’s total net loss was $429 million in 2021.
Teladoc’s massive acquisition of Livongo in 2020 for $18.5 billion is causing the dips you see in free cash flow and net income below. The price paid was roughly the size of Teladoc before the merger, so this was an enormous undertaking for the company. Today, Teladoc (the combined entity with Livongo) carries a market cap of just $10 billion, so you can see how things have not quite gone as hoped.
TDOC Net Income (TTM) data by YCharts.
The merger created a lot of expenses, many of them noncash charges like share-based compensation. These charges totaled $477 million in 2020, while the company’s total net losses were $485 million. In other words, the actual business came up just shy of breaking even. These merger-related charges totaled $569 million in 2021, which means the company would have posted profits without these adjustments, and the business itself generated $130 million in free cash flow.
This should continue in the right direction as revenue grows and many of these merger-related expenses begin to trail off. For 2022, management is guiding for negative earnings per share, or a loss of between $1.60 and $1.40, so investors will want to see that free cash flow continue to increase. If it does, bottom-line profitability might be a matter of time.
The stock market can sometimes exaggerate, and in Teladoc’s case, its price-to-sales ratio (P/S) has become cheaper than before COVID-19. This would imply that the company isn’t as healthy as before the pandemic, but I don’t see how that’s the case. Teladoc is bringing in far more revenue and producing free cash flow. And it recently launched Primary360, a service that combines all different types of care into an integrated user experience.
TDOC PS Ratio data by YCharts.
Perhaps the market is just doing what the market sometimes does, which is to act irrationally. I think it’s fair that the valuation would come down as revenue growth slows; you can see above how much the stock’s P/S increased in 2020.
Now, management is guiding for solid, average revenue growth of 25% per year over the next several years — a pace that could reward investors given the stock’s current valuation. It will, of course, be up to Teladoc to execute and realize its potential.
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