Teladoc (TDOC) enjoyed much of last year on an uptrend that led to the stock peaking at around $89. Yet, the end of the year 2018 selling took the stock back to the $40s. In the last two quarters, strong back-to-back earnings reports alleviated valuation concerns for TDOC stock. With the stock at $60, does Teladoc have more upside ahead?
In March, Teladoc said that it would expand in Canada. The company will maximize capturing an even bigger addressable market with minimal costs by launching an app. This will give its customers 24×7 access to medical care anywhere in Canada. And with Toronto (Ontario) and Vancouver (British Columbia) being the biggest markets for Teladoc, the company should not expect smooth sailing. In Ontario, the provincial government is cutting back on health care spending. If Teladoc wants to advertise that it covers all areas, it will have to give service to rural customers too. Chasing too few potential rural customers could drive costs higher.
In the near term, Teladoc’s challenge will be getting its name and service known. If it fails to gain recognition, this expansion will have more costs exceeding the revenue it brings in.
Strong Fourth-Quarter Results
The company reported an impressive 59% Y/Y revenue growth in the fourth quarter. Even though it lost $0.33 a share, strong user growth could justify the valuation. The stock trades at 9.6 times sales and four times book with the debt/equity of 0.42 times. If investors compare the company to other software services stocks, then TDOC is a bargain. MongoDB (MDB) trades at 30 times book, while Okta (OKTA), which I previously pitched to DIY Value Investors, trades at 49 times book.
Teladoc shares are stuck in a trading range and trail MongoDB and Okta in the last year:
Teladoc’s total visits grew 86% to 861,000. EBITDA grew 146%, albeit to just $5.8 million. For the year 2018, revenue grew 79% to $418 million as the company lost $1.47 a share. This is still an improvement over 2017, in which the company lost $1.93.
Teladoc ended the fiscal year with $478.5 million in cash and $562.5 million in debt.
2019 revenue will be $535-545 million, while EBITDA loss will be $40-50 million. The current Q1 is seasonally the weakest, so if the stock falls in this period, those who want to buy into the client growth may consider investing in it.
In the second quarter, management expects total revenue in the range of $128-131 million. Its EBITDA loss will be between $13 million and $15 million.
Teladoc’s path to profitability is measured by visits per user. If clinical services and products per user increases, the company could get closer to breakeven. Watch the utilization curve too. On the cost side, as call center requests fall from 60% to 26% in Q4, losses will decline.
Investors may look at Teladoc in two ways. If viewed at strictly as a health services supplier, then comparing its valuations to other software firms may prove expensive. Still, the company benefits from behavioral health driving growth within its clinical specialty unit. Momentum for DTC and B2B channels is driving strong adoption. This gives management the confidence that revenue will grow at above 50% for the full year.
Wall Street is extremely bullish on TDOC stock. 13 analysts covering the stock have an $81 target, or an upside of 40%. If investors assume revenue consistent growth of at least 20% or higher in the next five years, a 5-year DCF Revenue Exit Model (per finbox.io) suggests TDOC has a fair value of ~$75.
The drug store and drug plan market is out of favor and creating deep value opportunities in the sector. This bearishness may have pulled TDOC stock lower by limiting its rally following strong quarterly user growth. Technology investors will appreciate Teladoc’s moat in building a network with health plan providers. Its leading-edge online solution could help bridge the technology needs of the major players like CVS Health, Cigna, and UnitedHealth.
Thank you for your time in reading this article. For a limited time, I am inviting you to sign up for risk-free trial access to DIY (do-it-yourself) investing. This invitation will close after reaching capacity.
Please [+]Follow me for coverage on deeply-discounted software as a service companies. Click on the “follow” button beside my name.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.