Teladoc Q2 Earnings: Don’t Keep Buying Weak Execution (NYSE:TDOC)

Thesis

Teladoc’s (NYSE:TDOC) Q2 was a massive disappointment for the market, the media, and the Street. Notwithstanding, despite the underwhelming performance, and weak guidance, TDOC held its July lows firmly and did not break its May/June lows.

Therefore, we remain confident that TDOC has likely seen the worst of its sell-off, even though near-term volatility is expected. We also highlighted in a June article (Speculative Buy rating) suggesting that TDOC has likely bottomed out in May. TDOC also surged nearly 46% from our article before the post-earnings sell digested the recovery.

However, the stakes appeared to have shifted for Teladoc, given the ongoing macro challenges impacting consumer and corporate spending. Therefore, it will also likely affect Teladoc’s revenue growth and profitability.

Our revised valuation model also indicates that TDOC could struggle to maintain a market-outperform rating.

While we believe that TDOC remains well-supported at its long-term bottom, we are not convinced that it could outperform at the current levels.

As a result, we revise our rating from Speculative Buy to Hold.

Teladoc’s Weak Execution And Weak Guidance

Teladoc’s performance in 2022 has been subpar. It also highlights the inherently weak moats of its operating model, as it struggles to fend off competition from lower-end players. Therefore, the company has continued to underperform, exacerbated by worsening macros, impacting consumer and corporate spending. CEO Jason Gorevic accentuated (edited):

We are continuing to see our pipeline of Chronic Care deals develop more slowly than we anticipated at the start of the year. It remains early in the selling season, but deals continue to progress at a slower pace. We believe, at least in part, due to competitive noise as the market transitions from stand-alone point solutions to integrated whole-person virtual care. Based on what we’re currently seeing in the marketplace, we also believe heightened economic uncertainty over the past several months is increasingly playing a part in delaying the decision-making process in the employer market. (Teladoc FQ2’22 earnings call)

Accordingly, Teladoc posted revenue growth of 17.7% in FQ2 and an adjusted EBITDA margin of 9.6%. However, given the gamut of headwinds, the Street consensus (neutral) indicates further weaknesses through H2’22 before a potential recovery from FY23. Therefore, Teladoc’s challenges could be transitory as it’s hobbled by the macro challenges but expected to improve subsequently.

Notwithstanding, we didn’t observe confidence from management’s commentary, as it proffered guidance. CFO Mala Murthy articulated (edited):

We are looking to pull back in Q4 on ad spending. We’ve talked about the pricing dynamics in the holiday season. And I just also wanted to reiterate at this point, from a revenue perspective, we are seeing some modest incremental pressure on our yield on advertising spend in the BetterHelp business. We will just have to go through the year and see how the consumer dynamics play out and whether the consumer sentiment improves or it continues to be more towards belt-tightening. (Teladoc earnings)

TDOC’s Valuation Is No Longer Attractive

Given the significant revisions in the consensus estimates, Teladoc’s free cash flow (FCF) profitability is also projected to be affected markedly. Notably, TDOC is expected to post an FCF margin of 4.1% in FY24, down from its pre-earnings estimates of 9.3%. It’s also likely to impact its margins through 2024.

Stock	TDOC
Current market cap	$5.98B
Hurdle rate	20%
Projection through	CQ4’26
Required FCF yield in CQ4’26	2.5%
Assumed TTM FCF margin in CQ4’26	4.5%
Implied TTM revenue by CQ4’26	$7.43B

TDOC reverse cash flow valuation model. Data source: S&P Cap IQ, author

As a result, we revised our blended FCF margin to 4.5% but kept our model’s market-outperform hurdle rate of 20%. Consequently, we require Teladoc to deliver a TTM revenue of $7.43B by CQ4’26. It implies a revenue CAGR of 30.6% through CQ4’26, which we believe is highly unlikely.

Therefore, TDOC could struggle to meet our 20% hurdle rate, the minimum we demand for so-called high-growth stocks. As a result, we are confident that TDOC is unattractive at the current levels.

Is TDOC A Buy, Sell, Or Hold?

We revise our rating on TDOC from Speculative Buy to Hold, as we believe it’s likely at its long-term bottom (therefore not a Sell).

However, we are not convinced that TDOC could outperform, given the significantly revised estimates and competitive challenges to its operating model.

As a result, we urge investors to rotate their exposure to other growth and tech stocks.