Teladoc Health (NYSE:TDOC) is a perplexing stock to value here after the COVID-19 related boost to its business. The telemedicine company has seen a massive increase in demand, but a large portion of the growth is temporary in nature due to the general flu season. My investment thesis remains bearish on the stock here at $165 with the risks far outweighing the benefits to the business.
Image Source: Teladoc Health website
Unsustainable
For Q1, Teladoc reported a very impressive surge in medical visits. The company had originally guided towards visits of only 1.5 million in the quarter, and it actually reached 2.0 million visits in the quarter.
The 33% outperformance due to the coronavirus fears weren’t as impressive as the new guidance for 2.3 million to 2.4 million visits in Q2. The big question is whether these visit levels are sustainable in the short term and the ultimate impact of seasonal dips as the flu-like illness fades during the hotter summer months.
Teladoc guided towards 8 million to 9 million visits for the year, up from the original guidance of 5.5 million to 5.9 million. The 2020 total visits are up 2.5 million to 3.1 million from the previous estimates with a 0.5 million boost in Q1 and up to 1.0 million in Q2.
The key here is the guidance for the majority of the boost in the 1H of the year. Even if the 2H sees a similar boost in medical visits, the total visits per quarter will be down from the Q2 peak.
As mentioned on the Q1 earnings call, CEO Jason Gorevic sees some of the benefits of temporary members waning after the current quarter:
Our guidance ranges assume the significant surge in visit volume that we are currently experiencing eases over the course of the next few months, as $0 dollar copays begin to expire and shelter-in-place orders are lifted.
We expect volumes to settle in the second half of the year at a permanently higher level of utilization then pre-COVID levels as we benefit from increased consumer awareness and the impact of our engagement engine applied to newly activated and onboarded members.
As the current path of the virus is unknown, our guidance ranges do not include an incremental increase in volume that could result from the virus reemerging in the fall with the same level of intensity we are currently experiencing. As such, should the virus return in the fall, particularly if it were in conjunction with the typical flu season, it could result in higher-than-expected visit volume and revenue growth.
The biggest question is whether visits in the 2H settle at permanently higher levels of visits. In the past, visits have peaked in Q1 and declined throughout the summer months as the typical seasonal flow reduces usage. The quarterly visits for 2019 and 2018 by quarter are as follows:
- Q1 – 1,063, 606
- Q2 – 908, 533
- Q3 – 928, 641
- Q4 – 1,239,861
Typically, Teladoc sees a big sequential dip during Q2 with a boost during Q3 and a jump during Q4 to a peak in Q1. As COVID-19 fears wane, the risk is that the company misses the aggressive Q2 target of over 2.3 million visits. Either way, Q3 visits will most definitely dip from the elevated Q2 levels and the telemedicine expert will find it very difficult to replicate these visit levels next year.
Not So Profitable
The other side of the equation is the profit picture. In Q1, Teladoc had to pay additional fees to add licensed physicians into their network. The 92% surge in visits was only matched with 41% revenue growth.
Seen another way, Teladoc guided to visit growth in the year of nearly 50% above original estimates while only hiking revenues by $110 million, or ~15%. The benefit of the surge in demand is not really accrued to the business.
The company had originally guided to adjusted EBITDA for the year of $65 million and the new guidance is only a bump of $10 million to $75 million. Teladoc forecasts up to 5 million additional members at year end, but those totals are only adding ~$1 per month, hence the relatively small revenue boost.
Revenues don’t rise as much as the majority of revenues come from membership subscription revenues. The visit fee revenue was up 93%, but those revenues are a small fraction of revenues at only 24% of total revenues in its best quarter in history.
The stock now trades at nearly 165x EBITDA estimates with the stock price down to $165. To reach the old high of $200, Teladoc Health would have a valuation of 200x adjusted EBITDA. The stock would have a massive market cap of $15.0 billion.
Takeaway
The key investor takeaway is that Teladoc is priced for perfection when the company is going to face substantial seasonal issues with medical visits. Investors should brace for lower stock prices during the summer lulls with a chance to rebound in the fall when Q4 visits pick up.
The stock is likely to retest levels in the $120 to $140 range as COVID-19 fears disappear with an ultimate chance of falling to $100 again in a more rational stock market.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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