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Is Teladoc Health Stock A Buy?
Teladoc Health (NYSE: TDOC) hasn't been an easy stock for investors to hold -- its shares are down by a shocking 88% over the last three years. But few would deny that the company has a substantial amount of real value stemming from its extensive telehealth platform and massive base of subscribers.
So, is this business an appealing purchase right now, or is it doomed to underperform? Let's dive in.
Is telehealth still the future?
Per the bull thesis in favor of buying Teladoc, the road to riches for shareholders will be paved by the company's economies of scale that it will be able to realize as a result of being the highest-profile telehealth operator, with around 93 million members in the U.S.
When combined with its behavioral health and chronic care segments, as well as its deep links to insurers and its army of clinicians, the idea is that it will be highly efficient, and with an integrated ecosystem of care services that make it inconvenient for patients to go to a competing telehealth provider. In short, it stands to benefit from multiple network effects, each of which could constitute a competitive advantage if it can consistently tap its own resources correctly.
Unfortunately, 2024 hasn't been a bumper-crop year for this business, and that matters a lot relative to the health of its investment thesis. Compared to a year ago, its third-quarter revenue was down 3%, reaching $640.5 million, and its adjusted earnings before interests, taxes, depreciation, and amortization (EBITDA) fell by 6% in the same period, arriving at $83.3 million.
BetterHelp, its online behavioral-health service and its most promising growth prospect of the last couple of years, is also underperforming, with its revenue declining by 10% year over year as of the third quarter, bringing in $256.8 million.
Nobody is saying that telehealth is over. But with one of the biggest providers reporting lackluster results like these, it's reasonable to say that the gold rush era of telehealth, as stoked by the transition to virtual care during the start of the pandemic, is indeed over.
What remains is the industry's long slog toward sustainable companies that operate profitably on the basis of their telehealth services and the reimbursement those services get from health insurers and institutional buyers.
And Teladoc still has a way to go on that front. Its trailing-12-month selling and marketing expenses were $883.9 million, and its operating losses were $196.5 million. Its selling, general, and administrative (SG&A) expenses over that period were worth a shockingly high 51.3% of its revenue. That proportion appears to be falling over time, but it still emphasizes that the company has some work to do before it will be in any position to return capital to investors.
There's still a rationale for buying the stock
In the near term, there does not appear to be any pressing reason to load up on shares of Teladoc. In the long term, however, it is quite likely that it will be able to become at least somewhat profitable on a consistent basis, since there is not anything to suggest that its business is incapable of becoming more efficient.
Nor is its weakly contracting revenue a sign that competitors are making durable inroads and stealing its market share -- its core membership base isn't shrinking at all. So, achieving earnings will be a matter of squeezing a little bit more revenue out of each member per year while perhaps also reducing key overhead costs like marketing and processing claims paperwork.
That's a tall order for any specific quarter, but it is a manageable set of goals over a couple of years or more. It's also important to note that this company is not in any kind of race against time to become profitable; cutting back a bit on its non-crucial operating expenses like research and development would be enough for it to start producing positive operating cash flow immediately.
So is there an argument for buying Teladoc today on the basis of its future potential? Yes, there is, but it isn't a very strong one. Looking at its valuation, its enterprise-value-to-revenue multiple (EV/R) is just 0.9. This suggests that the market is taking a dim view of its ability to generate sufficient sales growth or profitability relative to its overall valuation, including its use of debt and equity financing.
Even considering the recent weak performance -- and more might be on the way -- such a low EV/R points to the market likely being overly pessimistic. Investors who buy the stock would get the benefit of the valuation correcting upward as sentiment improves over time. Still, it's an unavoidable conclusion that the bull thesis for Teladoc has yet to play out. Furthermore, there aren't any inklings that a turnaround is imminent.
With that in mind, if you're willing to take on some risk and hold the stock for at least the next three years or so, its valuation is attractive enough to buy it today. But there's no rush, so if you're interested in Teladoc Health, it probably makes more sense to add it to your watch list and wait for its performance to start to show signs of improvement before taking the plunge.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Teladoc Health. The Motley Fool has a disclosure policy.
