Teladoc: The Best Way to Play Virtual Health Care
Investment Thesis
Shares of Teladoc Health (NYSE: TDOC) have been in a downward trend since February, creating a compelling valuation with shares trading at just 11 times its current sales. My opinion is that the share price drop is only a temporary blip, and that this is a good time to enter into a long-term investment that will yield a CAGR of 20% over the next 10 years. To begin with, the company's top-line has grown tremendously since establishing itself as a one-stop shop platform for all your clinical needs. Moreover, Teledoc's dominance in the market along with their various virtual care offerings has given them an edge that will contribute in the long run to increased shareholder value. Last but not least, you'll find that the company is currently cheaply priced in comparison with other growth-oriented stocks.
Business Model
Teladoc provides virtual health care for various clinical conditions, mental health services, as well as complicated medical cases like cancer. The company earns revenue through subscriptions and fees for visits. Subscription revenue is derived from employers that pay a monthly or annual fee to offer the service to their employees. Visit fees are either paid by Teladoc's customers or by the members themselves.
Impressive Top Line Growth
Teladoc has demonstrated staggering growth on the top line with revenues increasing at a CAGR of 70% over the past five years. In its second-quarter earnings report, the company announced that it expects total revenue for 2021 to range between $2 billion and $2.025 billion. As a result, revenue would increase by +83% to 85% YoY, indicating another staggering year of revenue growth. Teledoc's ability to increase its paid membership per month has played a large role in this. Teladoc reported a paid membership per month of $1.02 for Q2 2020. That number has since increased to $2.47 in Q2 of 2021 representing a 142% increase. Despite the slowdown in paid membership growth for Teladoc, it has increased its fees and grown its revenue per member, which has driven this years top-line growth.
Source: TDOC Earnings Presentation
Long term, the company's top line will continue to grow at a high rate due to the fast growth of virtual care services. The global Telehealth market is estimated to grow at a CAGR of 32.1% from the years 2021-2028. In other words, the market remains largely untapped. Teladoc has a very good chance at acquiring the majority of this future market share due to being the overwhelmingly dominant player in the North American market. In addition, Teladoc's competitive advantage of being a one stop shop for the majority of your healthcare needs provides the firm with a long-term competitive advantage that sets them a part from the competition.
Source: BizVibe
As seen above, nobody in the Telemedicine market is even remotely close to Teladoc's size in terms of revenue. Since the Telehealth market is relatively untapped, this provides the business with an incredible amount of options with expansion going forward. Additionally, Teladoc maintains flexibility regarding how it charges its customers because it has little direct competitors. Even if membership and visit growth were to slowdown in the future the company has proven to have the market dominance to raise its fees. In my opinion, Teladoc can deliver revenue growth at a CAGR of 35-45% over the next five years. That would be a high enough figure to increase the share price substantially over that time period.
Compelling Valuation
Teladoc currently does not have any earnings or free cash flow making it hard to find an ideal valuation method for the company. It's unfortunate that I can't use my beloved discount cashflow model or future EPS multiple to provide me a rough forecast of its future share price or intrinsic value. The way I quantify the value of a company in its growth or zero earnings stage is to analyze the price of its top line. Nonetheless, My weapon of choice for valuing Teladoc is going to be the price-to-sales Ratio and the forward price-to-sales Ratio. The price-to-sales ratio is calculated by taking the market capitalization of a company, and dividing it by its annual sales. The forward price-to-sales ratio is the same calculation, except were using a 1yr sales estimate. I am using these two ratios because I will be conducting a comparative analysis with other high-growth technology companies with similar revenue size, and with little to no earnings. I will not compare Teladoc to other Telemedicine companies since Teladoc has no direct competitors with a market capitalization as high as its own. This analysis aims to determine how much I am paying for sales and future sales compared to the other high-growth companies.
As you can see from the above chart, Teladoc represents one of the lowest price-to-sales ratios out of all the companies mentioned. Therefor, investors are paying less for Teladoc's sales than they would be for other high-growth equities. We will now look at the comparison of the forward P/S ratios of all these companies.
Teladoc's P/S ratio, as well as Forward P/S ratio, are lower than a majority of those listed above, which means that investors would be paying less for Teladoc's future sales too. This indicates that the price being paid for Teladoc's top-line,
is inexpensive when compared to other growth-oriented technology stocks.
Teladoc's Risk Going Forward
Moving forward, Teladoc does face one risk that I feel should highlighted. The company's unconventional business model could be detrimental if future competition begins to stiffen. Teladoc charges clients a flat subscription fee and a visit fee, whereas competitors such as Doctor on Demand only charge customers with a visit fee. The purpose of this model is for Teladoc to be able to generate revenue even if a client doesn't use their service. In spite of this pricing model being beneficial for Teladoc, most customers would rather be charged only for the visit, so if no one uses the service, there is no fee. There is a possibility that future Telehealth businesses may adopt a business model similar to that of Doctor on Demand, which could steal away market share from Teladoc, or force them to change their pricing model. The result could be detrimental to Teladoc's top-line growth and long-term shareholder value. For these reasons, investors should be aware of this underlying possibility.
Bottom Line
To conclude my bullish argument, when you consider Teledoc's dominance in the Telehealth industry, the company's quality top-line growth, and the sales multiples investors are willing to pay for other high-growth technology companies, Teladoc is a compelling buy-and-hold. Which is why I view the drawback in its share price as an overreaction by the market. As Warren Buffet says, "buy when there's blood in the streets". Teladoc currently represents an ideal investment opportunity for those who are seeking exposure to innovative businesses and concepts but aren't willing to pay an egregious valuation.