Teladoc Health: The Recent Crash Was to Be Expected
Despite seeing initial success from the Livongo acquisition, the telehealth provider's losses are widening
Ishan Majumdar
May 03, 2021
Teladoc Health (TDOC, Financial) is a virtual healthcare company that offers a variety of care services, including primary care, mental health, chronic conditions, acute care and more.
The company has caught the eye of many contrarian investors after the recent stock price crash, which was driven largely by the expectation of its pandemic-linked tailwinds disappearing.
With the Livongo (LVGO, Financial) acquisition, the company is making significant investments to integrate and enhance its technology platform and is expected to capitalize on its robust data and behavioral science capabilities across the entire organization. Moreover, the whole-person care strategy of Teladoc that addresses the full spectrum of consumer health needs rather than just one particular disease is a major green flag.
The recent price crash was to be expected given that the pandemic attracted flocks of speculators who never planned to invest for the long-term. However, now that the price has fallen to a more reasonable level, could Teladoc offer returns to investors?
Recent financial performance
Teladoc has witnessed excellent top-line growth over the past year, driven by access fee revenues and visit fee revenues, but its losses have not gone down, which is also one of the reasons for the disappointment of shareholders.
The company reported revenue of $453.68 million for the first quarter of 2021, which was a staggering 150.93% improvement as compared to the $180.80 million reported in the corresponding quarter of the previous year. Apart from the Livongo acquisition, revenues were also driven by strong enrollments in chronic care programs. Teladoc managed to beat the analyst consensus estimate of $451.91 million.
The company's revenues translated into a gross margin of 67.83% and an operating margin of -17.27%, which was lower than that in the same quarter of 2020.
Teladoc reported a net loss of $199.65 million and an adjusted loss per share of $1.31, which was below the average Wall Street expectation of a loss per share of 54 cents. The company burned $18.03 million during the quarter in the form of operating cash losses, and this cash loss was again higher than that in the corresponding quarter of 2020.
Overall, the company has not been performing too well on the financial front and seems to be only increasing its losses as it grows.
The Livongo upside
In October 2020, Teladoc went ahead and acquired digital diabetes service provider Livongo for a consideration of $18.5 billion with a vision to create an all-inclusive virtual healthcare model. The acquisition allows for Teladoc's cross-selling opportunities given the lack of patient overlap with Livongo, thereby partially offsetting pressures from emerging competitors like Amazon Care (AMZN, Financial) and Cigna's (CI, Financial) acquisition of MDLive.
It is worth highlighting that the company's access fee revenue for the first quarter increased 183% year over year to $388 million and is primarily due to the acquisition of Livongo and InTouch Health, both generating the majority of their revenue from subscription access fees.
Moreover, the management stated that, of the 48 cents of sequential increase in PMPM (Per Member Per Month), roughly half was driven by the contribution of an extra month of Livongo revenue in the first quarter. Notably, membership in the Livongo chronic care suite of products grew 66% over the prior year with Teladoc adding 62,000 new chronic care members in the quarter. The company has partially integrated Livongo into the Teladoc app, enabling users to register for Livongo's care management programs for diabetes and hypertension within the same ecosystem.
To sum up, the whole chronic care management offerings from Livongo come as a valuable addition to Teladoc's portfolio after its success in mental health services through the BetterHelp acquisition.
Other key developments
The company has been expanding its offerings for existing clients, as well as adding new clients. Most recently, Teladoc signed an agreement to expand its relationship with a regional Blue Cross Blue Shield plan on the East Coast with a view to offering comprehensive whole-person virtual care solutions to its members.
The company also plans to provide access to its members to the extensive suite of products, including virtual care solutions and a full suite of digital chronic care solutions across diabetes, hypertension, diabetes prevention and mental health. In addition, Teladoc's Primary360 offering continues to gain significant traction from health plans, employers and also hospitals and health systems, thereby delivering encouraging results.
Internationally, the company partnered with Generali Hong Kong, a leading insurance carrier, to offer virtual care solutions to its members across Asia. In Australia, Teladoc announced its collaboration with MetLife (MET, Financial) to offer access to a customized platform across its comprehensive virtual care service to MetLife's members in the region.
Overall, there appear to be a number of good opportunities that could drive revenue growth in the long term.
Valuation
As we can see from the chart above, the stock price of Teladoc took a massive beating from its February 2021 highs after yet another wider-than-expected loss and weak guidance for paid U.S. memberships. Investors are worried about the continued losses and the inability of the management to show any kind of positive bottom-line as of yet.
Despite the crash, the company is still trading at a very high enterprise-value-to-revenue multiple of close to 25, which is above the healthcare services industry average. Thus, I believe Teladoc is a risky investment at current levels given its losses.
On the other hand, the company has a huge growth opportunity in telehealth after the acquisitions of Livongo and InTouch Health. In my opinion, investors should keep the company on their watch list until we see some positive news or some kind of strength in its financial performance.
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