Teladoc Health: Cathie Wood Favorite Still Struggling

Summary:

• Teladoc’s Q4 report showed slowing revenue growth and missed street estimates, but losses were better than the prior year period.
• The company’s revenue guidance for the current quarter, full year, and next two years was fairly downbeat.
• TDOC’s losses are improving, and its balance sheet is in fair shape, leading to a depressed valuation and the potential for activist investor involvement or an acquisition.

After the bell on Tuesday, we received fourth quarter results from Teladoc (NYSE:TDOC). The tele-health provider is one of the Cathie Wood favorites and prior pandemic darlings, seeing its shares soar to over $300 a share as revenue growth soared rates skyrocketed due to the coronavirus. In the past couple of years, however, the stock has plunged back to the teens as sales growth has slowed mightily, and the latest results suggest the company may do best if acquired by a larger player.

Teladoc describes itself as the global leader in whole-person virtual care, with approximately 90 million members. The platform offers a variety of virtual health services, including some mental health offerings. In 2021, the company nearly doubled its revenues over the prior year to over $2 billion, partially due to its merger with Livongo, but growth has slowed considerably since. For the just reported full year in 2023, Teladoc reported just over $2.6 billion in total revenues, but that figure increased by less than $200 million, and the ending figure was below the midpoint of guidance that management originally provided back at its Q4 2022 report.

When I last covered the name in depth, I was bearish due to the slowing revenue growth situation and large losses. At that point, shares were above $35, and they have underperformed the S&P 500 by more than 60 percentage points since. Since that time, the revenue growth picture has not improved, but the company has reduced its losses and started to generate some decent cash flow (although at the cost of some dilution).

For Q4 2023, revenues came in at $660.5 million. This was less than 4% year-over-year growth and missed street estimates by more than $10 million. US revenues were up less than 1.9%, while the company reported a roughly 8% decline in total visits as well as a decline in average monthly revenue per US Integrated Care Member. The BetterHelp segment, which is supposed to be the main growth engine currently, saw a 6% decline in users over Q4 2022. Pretty much all of the company’s main user and revenue metrics showed much worse performance than the previous three quarters of 2023.

The one area where Teladoc did okay was in terms of its expense structure. Management has done a decent job in recent quarters of right sizing the business, and that resulted in an improvement in GAAP losses in Q4 (even when excluding impairment charges). Adjusted EBITDA for the period rose about 21.6% to more than $114 million, and the whole year number is expected to further improve over the next couple of years.

Perhaps the worst part of Tuesday’s report was the guidance. Teladoc management is calling for Q1 revenues in a range of $630 million to $645 million, well below the average street estimate of $671 million. A non-GAAP loss per share of 45 cents to 55 cents is also forecast, whereas the street was looking for a loss of 37 cents. For the full year, revenues are expected to be in a range of $2.635 billion to $2.735 billion, with the high end of that below the street’s average expectation of $2.77 billion. The adjusted loss per share forecast of 80 cents to $1.10 did fare a little better, however, against an expected loss of $1.05.

Unfortunately, Teladoc management did little to show that this would be a short-term growth problem. The company provided a three-year outlook detailing low to mid-single-digit annual consolidated revenue growth, including mid-single-digit Integrated Care and low single-digit BetterHelp annual revenue growth. For this period of 2024 to 2026, the street was expecting growth of 6.0%, 5.3%, and 8.2%, respectively, so this forecast is also a bit disappointing. The only good news is that management is calling for at least $425 million of adjusted EBITDA in 2025, compared to a range of $350 million to $390 million this year, and $328 million in the just finished 2023.

When it comes to the balance sheet, things are a bit mixed. The company does have over $1.12 billion in cash, but almost two-thirds of its asset base is composed of either goodwill or intangible assets. Teladoc has over $1.52 billion of convertible debt, at conversion prices much higher than the stock is trading at now. The only good news is that only about $550 million of that comes due by the summer of 2025, with the rest not due until 2027. Free cash flow of nearly $194 million was generated last year, with even more than that expected this year, but that’s mostly coming from stock-based compensation offsets that are sending the share count higher by the quarter.

In terms of valuation, Teladoc in the after-hours session is trading at 1.07 times its expected revenue for this year. That’s well below what most low-growth, large-loss software type names go for in the low to mid-single digits on a price-to-sales basis. A fellow name in the space, American Well Corporation (AMWL) goes for 1.37 times its expected revenues this year and has a lower short-term growth forecast but more expected growth in the following years. American Well has a slightly better balance sheet but is also burning quite a bit of cash at the moment.

With Teladoc shares losing more than half of their value since I last put a rating on the name, I’m retaining the hold today. The first reason is valuation because I think shares are a little cheap compared to American Well. In my opinion, Teladoc should be a little cheaper based on its lower long-term revenue growth outlook, but it’s currently trading at around a quite meaningful 22% discount. That’s a bit much, especially considering Teladoc is a lot closer to being profitable than American Well.

I also believe that with a market cap under $3 billion, Teladoc may be ripe for an acquisition from a name like Amazon (AMZN) that is looking to expand its tele-health services or another large health player looking to get access to the roughly 90 million user base. I also think Teladoc management set some more realistic expectations for the next couple of years this week, which could leave less room for further downside surprises. I wouldn’t recommend a buy here, however, just because I need to see Teladoc show some better user and revenue growth moving forward to justify a potentially higher valuation.

In the short term, I’ll be focusing on what Cathie Wood and Ark Invest do. The high-profile ETF manager reported owning 12.82% of Teladoc at the end of last year, although that percentage has come down a little since due to ETF redemptions. Teladoc is held in the flagship ARK Innovation ETF (ARKK), as well as the ARK Next-Generation Internet ETF (ARKW), ARK Genomic Revolution ETF (ARKG), and ARK Fintech Revolution ETF (ARKF). As I discussed in previous articles, Cathie Wood has stated that Teladoc could be the next category killer like Amazon, previously saying that shares of Teladoc could eventually surpass their previous all-time high.

In the end, Teladoc shares tumbled on Tuesday afternoon after a very disappointing Q4 report. The company missed street estimates for revenues, while reporting total visit declines and a slight revenue decrease for its BetterHelp segment. Management issued downbeat revenue guidance for the current quarter, full year, and next two years, suggesting potential growth will be extremely low. The only good news here is that losses are improving, and the balance sheet is in fair shape for now. The valuation is depressed at the moment due to the growth problem, which has me reiterating the hold here, as I think an activist investor entering or a potential acquisition becomes more likely with the latest drop.

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