Teladoc Stock: The White Flag (NYSE:TDOC)

This is capitulation. That is what is happening in this market. People are giving up. Stocks are getting smashed. This is especially true for the innovative revenue-growth-but-no-earnings type of tech stocks.

One name that looks like investors have waved the white flag is in Teladoc Health, Inc. (NYSE:TDOC). This stock has been absolutely crushed. There is panic and fear here, and it has been going on for a while. This has led to what is best described as a major collapse. This stock is down over 90% from all-time highs. Ouch.

While we like long-term investing and holding good stocks, this has been painful. We actually like the stock in the $20s for a bounce. We think it is best played by taking advantage of the high volatility right now in the market, and suggest selling out of the money puts for income and/or to define your entry points. Alternatively, we support a buy/write strategy, as several month out call option premium. We are taking the contrarian view against the panic and fear crowd, and think this stock rallies hard on any relief in the broader markets.

Discussion

There is not much you can do about the macro situation right now. It is just tough with the Fed’s relentless battle to reduce inflation. Stocks are just getting creamed. But a lot of the damage has been priced in. Rest assured, broader inflation has not caused telemedicine to suddenly stop. In fact, it is becoming more and more mainstream.

Of course, telemedicine is not something that other companies cannot replicate. There are other players out there. This leads to concern over the company having any kind of moat. Make no mistake, the market has been horrible the entire year, it seems, with only moments of relief rallies. That said, tech has been hit the absolute hardest. It is speculative, but we see this stock as looking to bottom along with operations.

The total addressable market (“TAM”) is growing. It is likely that this market is expanding and will continue to do so for many years. The fact is that more and more people are connected to the Internet, getting into the metaverse, and opening up more and more to using technology to communicate. People like the comfort of not leaving their homes if they do not need to in order to receive services. This is a lasting impact of the COVID pandemic.

This stock had exploded higher during the pandemic but the super-high growth has stalled. Some of this is because the landscape is challenging, there are competitors, there are issues with getting new providers onboarded, there are higher costs, and there are constant battles for reimbursement. But we believe Teladoc is the cream of the crop for this field and believe in the company long-term. We think you can start buying in the 20s if you have not already.

In this market, companies with high revenue growth but little to no earnings are seeing their stocks largely collapse under the weight of a higher rate environment and recessionary pressures, but the market has been pricing in recession for months. We are contrarian and see the market starting to stabilize in the coming weeks, especially if the next CPI inflation report shows progress being made to encourage disinflation. The market could rally very hard indeed on this news.

The macro situation aside, Teladoc has had some of its own performance issues. In fact, we can blame the poor market, or the Fed, or higher rates all we want, but in the recent quarter Teladoc underperformed.

Teladoc growth slows

You know, what is interesting is that in the quarter the company beat consensus estimates on both the top and bottom lines. That was impressive, honestly, considering the performance declines. The rapid growth is over, but the company is still showing growth.

The top line saw a revenue beat by $5 million. They had a massive goodwill charge of $3.0 billion that was recorded leading to a GAAP net loss of $19.22 per share, vs. a loss of $0.86 last year. Revenue increased 8% to $592.4 million, from $503.1 million a year ago. The growth is positive to see, but is at a much lower pace than in years past. Access fee revenue growing 20% to $518.7 million was the primary drive. However, visit fee revenue growth was just 7%, rising to $66.7 million. One positive to take note of and to watch for in the Q3 report is the average revenue per U.S. paid member increased. It jumped to $2.60 in the quarter from $2.31 last year and was up from Q1 2022 as well.

A larger performance issue is further down the line. It is concerning that EBITDA has declined. In Q2, adjusted EBITDA dropped like a rock, declining 30% to $46.7 million, compared to $66.8 million last year. We suspect these pressures continue another few quarters, but have to see if management can deliver on its plans to expand the business. The broader market is what it is. It stinks right now, but Teladoc needs to control its operations. We were pleased to see that despite the revenue growth pace stalling, margins improved. Margins expanded to 68.2% on a GAAP basis vs. 67.9% a year ago. Adjusted gross margin expanded to 69.2% from 68.1%.

The forward view was a kitchen-sink type outlook

Teladoc stock has gone nowhere but slowly down since it reported. The reason for the decline, aside from the market, is that guidance was revised lower. Management has frequently changed guidance and in the past, they have failed to meet them. These missteps have led to a lack of faith in the guidance, but a lower guidance makes things much worse.

Q3 guidance was poor. Management guided revenue to range between $600 and $620 million. This was disappointing compared to the consensus expectation of $618.36 million. On top of that, the company guided for a loss on EBITDA of $29 to $46 million but should be a positive adjusted EBITDA of $35 to $45 million. Positive adjusted EBITDA is great, but this will be way down from last year. Adjusted EBITDA was $67.4 million for the third quarter of 2021. In addition, it could even be down compared to the $39.5 million for Q3 2020. Pretty poor view.

So why get long?

The market has priced in disaster throughout much of the innovative tech-type investments. In general, a ton of poor news is priced in here. Some of the decline is warranted with revenue growth is stalling. The stock has been revalued to fresh lows in the mid $20s. Yet, revenue is still growing. And we like that the revenue per user is growing.

The company also should continue to experience growth in the coming quarters, even though the growth rate has come to a crawl vs. a few years ago. For the year, Teladoc sees revenue coming in at $2.4 billion to $2.5 billion, which would be growth of 18% to 23% over the prior year, even if it comes in toward the lower end. While it is growth, it’s much less than the possible $2.65 billion guided to start the year. This is the kind of concern we referred to regarding management’s bullish views then having to wall them back on underperformance. That said, even with the refined view, the company is showing growth. Teladoc sees total visits in 2022 to be between 18.5 million and 19.5 million visits while membership continues to grow.

The balance sheet is also decent here. Teladoc ended the quarter with $884 million of cash versus $1.53 billion of debt. While this is a good amount of debt, the company has lots of positive cash being generated from operations to cover interest expense and principal debt payments.

Finally the valuation is so much more reasonable than it had been a year ago. We are trading at just 1.8 FWD sales and 2.1 enterprise value to sales. This is cheap. The stock also trades at 0.7X book value, implying the stock is valued less than the book value of the company.

All things considered, the market is just being too negative on TDOC stock. We think it is priced for disaster, and so upside is tremendous if news/the outlook improves for Teladoc. The stock should enjoy a strong rally if the broader tech market catches a bid as well.