Teladoc Post Q2 Earnings: Stick A Fork In This Stock – It’s Nearly Done (For)

Summary:

• Teladoc Health, Inc. stock has plummeted >95% since its peak in early 2021, with the downtrend near constant.
• Losses are usually exacerbated by quarterly earnings, and Q2 earnings, announced yesterday, were no exception.
• Teladoc’s new CEO withdrew all guidance for 2024, signaling potential challenges ahead, especially with the BetterHelp segment facing high customer acquisition costs and churn.
• The other division, Integrated Care, earned just $1.36 per member every year, according to my understanding.
• In short, while logically Teladoc’s value proposition makes sense, the company finds itself in a very difficult position and may be doomed to failure — like many of its rivals.

Investment Overview

The last time I provided coverage of Teladoc Health, Inc. (NYSE:TDOC), the Purchase, New York-based virtual healthcare/telemedicine provider, it was in 2023, and I gave the company’s stock a “sell” rating with shares trading at $17. Today, they are priced at $8.7 a share (at the time of writing), down nearly 50%.

This is one of the easier calls I have made in notes for Seeking Alpha covering the healthcare, pharma, and biotech industries. Ever since reaching a stunning high of >$290 per share at the height of the pandemic in early 2021 – when the lockdown period was making the case for a virtual healthcare provider more powerfully than anybody could have predicted – Teladoc stock has been in a near constant downtrend.

By the end of 2021, shares had fallen in value to ~$90 per share, and the business, which had reached a market cap valuation of ~$50bn earlier that year, was worth ~$15bn. At the end of 2022, shares traded ~$25 per share, and at the end of 2023, ~$20 per share.

Before announcing its Q2 2024 earnings yesterday, Teladoc stock was worth ~$9.5 per share, and pre-market today was priced at ~$7.5 per share. In short, since hitting its peak of $290 per share, nearly 6 years after its 2015 IPO, which raised ~$157m at ~$19 per share, there has barely been a day when Teladoc’s stock price hasn’t been falling in value.

Here is Teladoc’s mission statement, shared in the company’s Q1 2024 quarterly report / 10-Q submission:

We were founded on a simple, yet revolutionary idea: that everyone should have access to the best healthcare, anywhere in the world, on their terms.

Today, we have a vision of making virtual care the first step on any healthcare journey, and we are delivering on this mission by providing whole-person virtual care that includes primary care, mental health, chronic condition management, and more.

On the face of it, the logic behind the value proposition appears to be sound – why physically visit a physician’s office when you can hold an online consultation? Let the power of modern technology – algorithms, AI, data analytics, etc. create a holistic healthcare package that can help patients while saving money.

There is just one problem – patients, physicians, and health insurers aren’t buying into Teladoc’s products and offerings, and the company is hemorrhaging cash. It is not just Teladoc, either – as I wrote last October:

Babylon Health, a United Kingdom-based virtual care pioneer that was listed on the New York Stock Exchange in 2021, saw shares fall from a high of $272.5 to <$1 before the company delisted amid bankruptcy fears. UpHealth, Inc. (UPH), which is listed on the Nasdaq via a Special Purpose Acquisition Company (“SPAC”), has a $16m market cap valuation today, down >90% since listing.

Talkspace, a platform designed to connect patients to licensed mental health professionals, has seen shares decline >80% in value since listing. Shares of American Well Corporation (AMWL), a provider of online healthcare services, are down >95% during the past five years, and shares of Ontrak, a provider of data analytics-based behavioral health management, are down >98% over five years.

Since I wrote that, Uphealth has delisted, and another provider of “mobile health services,” DocGo Inc. (DCGO), has seen shares decline by >55% this year, reaching an all-time low of <$3 in April.

Ironically, the failure of almost every listed company hoping to provide virtual healthcare solutions makes Teladoc a relative success story – at least it has not declared bankruptcy yet. However, after completing its $18bn merger with Livongo in October 2020, the combination of Teladoc’s virtual visit technology, and Livongo’s remote patient monitoring was supposed to usher in a new era in healthcare, which has failed to come to pass.

In Teladoc’s defense, the company has grown revenues in every year since 2015, from $77.4m in that year, to $2.6bn last year. With that said, the company has made an operating loss every year also – since 2020, working forwards, GAAP operating losses have been $(418.2m), $(239m), $(227.4m), and $(210.5m).

For a company with significant growth potential, these numbers do not look all that bad – Teladoc holds >$1bn in cash, so is in no imminent financial danger. Even the extraordinary $(13.7bn) net loss reported in 2022 is forgivable in some ways – the pandemic created a valuation bubble, and a non-cash goodwill write-down was necessary. Even so, the question has to be asked – is there any reason to believe Teladoc can experience a reversal in fortunes, and begin delivering shareholder value?

In this review of Q2 earnings, I’ll attempt to answer this question.

Q2 Earnings Overview – Losses, Writedowns, & Guidance Withdrawn

Let’s begin with some headline figures – in Q2 2024, Tealdoc generated revenue of $642.4m, which represented a 2% year-on-year decrease. Net loss came to $(837.7m), or $(4.92) per share, which included another goodwill impairment charge, this time of $790m. Adjusted EBITDA was $89.5m, up 24% year-on-year. Teladoc Integrated Care segment earned $377.4m of revenues, up 5% year-on-year, and its BetterHelp segment earned $265m of revenues, down 9% year-on-year, The two segments adjusted EBITDA margins were 17%, and 9.6% respectively.

Teladoc appointed a new CEO in June, after its long-time leader (for 15 years) Jason Gorevic stepped down suddenly in April, paying the price for overseeing a >90% decline in the share price. He is replaced by Charles “Chuck” Divita III, who was formerly Executive Vice President, Commercial Markets at GuideWell, a “leading health solutions organization which includes Florida Blue, the market leading health plan in Florida.”

New CEO Divita was presiding over his first earnings call and delivered a fairly downbeat assessment of the company and its products and services. His first major decision appears to have been to withdraw all guidance for 2024, and all longer-term guidance. During the earnings call, Chief Financial Officer (“CFO”) Mala Murthy broke the news as follows:

We are choosing to not provide segment revenue or adjusted EBITDA guidance for the third quarter, and we are withdrawing our full-year guidance for both metrics in our BetterHelp segment at this time. We recognize the challenge this presents from a modeling standpoint. Therefore, to provide a baseline, we note that if customer acquisition costs continue at current levels, we would expect the second half of 2024 revenue to decline in the low double digits.

Consistent with our decision to not provide guidance for the BetterHelp segment, we are therefore not providing guidance for the consolidated company, revenue, adjusted EBITDA, net loss per share, or free cash flow for the third quarter or full year 2024. We continue to make progress executing against our cost-saving productivity initiatives, and we remain on track to deliver $43 million in cost savings on a GAAP basis for our business in 2024, and a total of $85 million in 2025.

Future of BetterHelp In Doubt?

BetterHelp, the virtual mental health counselling service that Teladoc operates, has arguably been its most successful business, however, it seems clear from comments made on the Q2 earnings call that it is running into problems.

First, the cost of customer acquisition is too high. Teladoc invests heavily in advertising BetterHelp, but has opted to reduce spending, as CFO Murthy explained:

In the first quarter, we saw challenging customer acquisition costs through early Q1, which caused us to pull back on our advertising dollars in the quarter in keeping with our goals to balance growth and margin.

Secondly, Better Help has high churn because, although customers may like the service provided, they object to paying out-of-pocket for it. Here is Murthy again:

Affordability is the main reason users, as they go through sort of the path to enroll with BetterHelp, don’t convert, and it’s honestly the number one cause for customer churn.

The solution would be for Teladoc to secure a reimbursement deal with a health insurer that would then offer the service to its members, who would then have a much smaller, or no out-of-pocket, cost to pay. But what is the value proposition for the health insurer?

At present, it seems BetterHelp is rapidly turning into an unprofitable business in which too many advertising dollars are spent attracting customers who don’t dislike the service, but aren’t prepared to pay subscription fees for it either.

Whether a health insurer would add BetterHelp to its plan, to give itself a competitive advantage, is the key question. However, I also wonder if Teladoc’s new CEO is already contemplating a sale of BetterHelp, as it must surely be the case that Teladoc has approached health insurers in the past about a collaboration, and been turned down.

Integrated Care Services Offer Some Qualified Hope

Here is what CEO Divita had to say about Teladoc’s Integrated Care business on the Q2 earnings call:

Our Integrated Care business achieved solid business and financial results, including on both a top-line and adjusted EBITDA basis. In the U.S., Integrated Care members have grown by nearly 3 million people since the beginning of the year, including 600,000 on a sequential quarter basis.

International business continued to grow and create further expansion opportunities. I’m also pleased to see additional ways that our teams are working together across our various businesses to create new areas of differentiation for Teladoc Health.

From a commercial perspective, three-quarters of our bookings in the second quarter came from cross-selling into our existing book of business, continuing the momentum we’ve seen over the past several quarters, with the remainder coming from new clients.

Our Chronic Care bundled solutions are generating solid interest from new and existing clients, and we remain focused on increasing our product penetration to serve more people.

Once again, a bundled chronic care package is something that logically, could be stored and accessed online, or virtually, so perhaps there is scope for this business to develop and flourish?

On the other hand, Teladoc also shared the statistic that “average Integrated Care revenue per U.S. member of $1.36 decreased by $0.05 versus the prior year’s second quarter.” Note, that is one dollar and thirty-six cents, not $136, which seems an exceptionally low figure, hinting at the fact that users are barely accessing any services.

Teladoc even provided some guidance for the Integrated Care segment – as per CFO Murthy:

We continue to expect 2024 revenue growth in the low to mid-single digits. We are narrowing our range for adjusted EBITDA margin expansion, which we now expect to be up 150 to 200 basis points.

We are raising the lower end of our U.S. Integrated Care member guidance range and now expect 92.5 million to 94 million members at year-end.

Nevertheless, if it requires 100m members for the Integrated Care segment to earn $136m dollars of revenues, then arguably, this business is no better off than the BetterHelp segment.

Concluding Thoughts – I Can’t Find Any Positives & Can See A Sale Or Exit On The Cards

Although this may sound a little cynical, you could make the argument that every one of Teladoc’s quarterly earnings updates since mi-2021 has been more concerning than the last and triggered a sell-off. Q2 2024 does not seem to be an exception.

A new CEO appears less than impressed with the two core businesses that Teladoc has been whittled down to. One appears to be headed on a path to becoming loss-making, and the other appears to be barely accessed by its users.

After the past three years, I am not surprised that the long-term CEO has departed the company. This is because, as promising and logical as virtual healthcare might seem, it simply isn’t a product that anybody seems interested in buying, or accessing, today.

Numerous businesses in this field have declared bankruptcy or delisted, or may well do so in the coming months or years, and despite its “800 pound gorilla” status, I’d be inclined to add Teladoc to that list. How much more motivation can there be to keep flogging this dead horse?

If you were looking for positives, the potential for Teladoc to collaborate with a health insurer of note – a UnitedHealth Group Incorporated (UNH), CVS Health Corporation (CVS), or Humana Inc. (HUM), for example – and develop some kind of integrated digital offering could be a strategy for management to pursue. However, I wonder if Teladoc even has any technology that a health insurer could not recreate in-house, much more cheaply, rather than making a bid for the company. Is there any proprietary technology of value at Teladoc?

Back in October 2020, with Teladoc stock trading >$195, I suggested that Teladoc’s business “ought to grow and grow” in a note shared with Seeking Alpha readers. How could the public, and the healthcare industry, ignore the obvious promise of “virtual healthcare”?

Perhaps in issuing this sell recommendation, I am calling it wrong again. It seems, though, in the cold light of day, the public, and the healthcare industry have been extremely consistent in its view on telemedicine. They don’t seem to want to use it, and they definitely don’t want to pay for it.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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