FatCamera
Elevator Pitch
My investment rating for Teladoc Health, Inc.’s (NYSE:TDOC) stock is a Hold.
In my earlier initiation article for Teladoc Health written on July 23, 2021, I touched on TDOC’s poor share price performance for the first half of last year, noting that its “current valuations are still demanding.” TDOC’s stock price subsequently fell by -84.0% in the 15-month period following the publication of my prior article, and this has prompted me to share my thoughts about Teladoc Health again in this new article.
Specifically, I am focusing on Teladoc Health’s full-year outlook and the potential M&A catalyst for TDOC with the current update. On one hand, I am worried about the possibility of a reduction in FY 2022 management guidance for Teladoc Health. On the other hand, TDOC’s valuations are much more reasonable now, and there is a chance that the company could be bought out by a strategic acquirer. Taking into account both the upside potential and downside risks associated with the stock, I continue to have a Hold rating for TDOC.
All Eyes On Full-Year Fiscal 2022 Management Guidance
TDOC will reveal the company’s financial performance for Q3 2022 in the following week on October 26, 2022. This is a key event for Teladoc Health. As I mentioned at the start of this article, TDOC’s shares have done poorly (-84.0%) in the past 15 months. If Teladoc Health makes significant changes to the company’s FY 2022 guidance when it reports its third quarter results, this will likely drive Teladoc Health’s share price even lower.
In the last three months, 23 of the 31 Wall Street analysts who cover TDOC’s shares decided to reduce their FY 2022 top line projections for the company. According to S&P Capital IQ data, the current sell-side’s consensus FY 2022 revenue forecast of $2,405 million for Teladoc Health points to the company generating a top line expansion of +18.3% for the current fiscal year. This is much slower than TDOC’s FY 2021 revenue increase of +85.8%. At the same time, the sell-side analysts also estimate that Teladoc Health’s non-GAAP adjusted EBITDA will decrease by -12.7% from $267.8 million for FY 2021 to $233.8 million in FY 2022.
It is important to note that analysts have largely pegged their financial forecasts to Teladoc Health’s fiscal 2022 management guidance. The Wall Street’s consensus FY 2022 top line falls at the lower end of TDOC’s revenue guidance of between $2.4 billion and $2.5 billion, as indicated in the company’s Q2 2022 financial results press release. Teladoc Health’s consensus adjusted EBITDA projection for fiscal 2022 is slightly lower than the company’s EBITDA guidance in the $240-$265 million range.
The key question is whether TDOC’s current management guidance is sufficiently conservative. Assuming that Teladoc Health revises the company’s full-year management guidance downwards as part of its Q3 results announcement, it will naturally lead to another round of cuts in analysts’ financial forecasts and further share price declines for TDOC.
My view is that there is a reasonably high probability of Teladoc Health issuing lower FY 2022 EBITDA guidance next week.
In its second quarter results media release, TDOC had disclosed that the company is expecting to generate EBITDA of $40 million and $252.5 million, respectively based on the mid-point of its guidance. In other words, Teladoc Health will have to deliver a significantly higher adjusted EBITDA of approximately $111.3 million in Q4 2022 to meet its full-year FY 2022 guidance, considering that the company achieved an adjusted EBITDA of $101.2 million for 1H 2022.
Based on S&P Capital IQ’s financial data, TDOC’s highest quarterly EBITDA since its 2015 IPO was $77.1 million registered in Q4 2021. At the company’s Q2 2022 earnings call, Teladoc Health noted that its EBITDA guidance is based on expectations that “A&M (Advertising & Marketing) spend” will “come down materially in the fourth quarter.” TDOC stressed that the expected decline in A&M expenses for Q4 2022 is part of the “typical seasonality in spend” which “is to see a ramp-up in the early part of the year and a pullback in Q4.”
It is necessary to review Teladoc Health’s revenue growth expectations on top of interpreting management’s comments. The mid-point of TDOC’s current top line guidance for Q3 2022 and FY 2022 are $610 million and $2,450 million, respectively. This translates into expected YoY revenue growth rates of +16.9% and +23.1% for Teladoc in Q3 2022 and Q4 2022, respectively.
Even after accounting for “seasonality effects”, it will be tough for Teladoc Health to reduce its A&M expenses to a large extent in Q4 2022, while still achieving the targeted revenue growth for the final quarter of the year. As such, I see a substantial risk of TDOC lowering the company’s full-year FY 2022 EBITDA guidance.
TDOC’s Valuations Suggest That It Is A Potential M&A Target
Putting TDOC’s near-term financial outlook aside, Teladoc Health’s valuations have now come down to pretty reasonable levels, which could possibly attract the interest of strategic acquirers.
TDOC’s consensus forward next twelve months’ Enterprise Value-to-Revenue multiple has derated from its all-time peak of 23.5 times recorded on the February 8, 2021 trading day to a mere 1.8 times as of October 19, 2022, as per S&P Capital IQ’s valuation data. Also, Teladoc Health’s consensus forward next twelve months’ EV/EBITDA metric has dropped from 47.3 times at the beginning of 2022 to just 18.0 times at the end of the October 19, 2022 trading day.
An earlier Seeking Alpha News article published on July 29, 2022 cited Gordon Haskett Research Advisors’ opinion that “CVS (CVS) or Walgreens (WBA) could be interested in TDOC in the $50/share range.” TDOC’s last done share price was $24.25 as of October 19, 2022, or less than half of what Gordon Haskett Research Advisors viewed as an attractive entry point ($50) for strategic buyers such as WBA or CVS.
Closing Thoughts
I rate Teladoc Health’s shares as a Hold, as the risk-reward for the stock is balanced. In terms of downside risks, a cut in FY 2022 guidance could be a big negative surprise for TDOC. With respect to upside potential, Teladoc Health’s valuation multiples have compressed substantially, and this could make it attractive in the eyes of certain strategic acquirers.
Be the first to comment