We are adding TDOC as a Best Idea Short and see downside of -15% to -30% in the next 6 months. Before the pandemic of 2020, telemedicine was rare and Teladoc was special, but in the aftermath, the competitive landscape has changed dramatically, and we can more easily identify the hurdles ahead than we can see the upside. Teladoc has a solid history of acquisitions and driving growth, but the most recent acquisition of Livongo on September 30, 2020, looks defensive and likely late as the US Medical Economy has been radically adjusting to the post-pandemic world. On the surface the rationale for the acquisition looks great - cross sell Livongo 500K lives into Teladoc's 70M lives book of business. Success penetrating even a small percentage of the Teladoc book would more than justify paying $18B and 48X EV/Sales for Livongo. Looking closer, we believe the upside scenarios are a stretch and growth will be challenging.
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HEDGEYE HEALTH CARE WRITE-UP
Background
Teladoc Health (TDOC) was the first public, pure-play telehealth solution when a video visit was the forefront of digital health innovation. Prior to the onset of COVID-19, we added TDOC as a Long Bias Idea on October 7, 2019, at $69.22/share then moved it up to a Best Idea Long on March 30, 2020 in response to the pandemic. The telemedicine landscape has evolved and become widely available and competitive as the number of alternatives for basic primary care, chronic care management, mental health, and niche care areas flooded the market. At the peak of the pandemic, TDOC traded at $291 and ~16x EV/NTM Sales versus the pre-pandemic range of 3X-5X, but market factors and fundamental concerns have pulled the multiple back to 9.5X and a price of $140.
Thesis
Our current forecast model reflects Livongo and the additional detail given around TDOC’s transformed business. We have incorporated the additions they company has made to their US Subscription Access which in turn has allowed them to drive a higher PMPM across the platform than previously possible from their legacy offering. By adding higher ticket items, such as chronic care enrollment (through Livongo), Teladoc set their sights to convert a high percentage of the 70M covered lives to a higher- ticketed chronic care enrollment program. On the margin, Livongo enrollment has been disappointing so far in 2021, but what really matters is their first full year of cross selling and their guidance for 2022.
From our discussions we have heard a range of opinions from physicians, advance primary care practices, vendors, benefits administrators, and consultants, about the opportunity and risks ahead. The market has clearly moved on from the emergency COVID-19 pandemic response of 2020. The market may have even moved on from Teladoc's core offering while competitive offerings have mushroomed, some of which pose a credible threat. The biggest problem we see may be a far more limited TAM for the Livongo cross sell and slowing market adoption more broadly for chronic care solutions. We believe our thesis will play out in the form of lower than expected Livongo growth and 2022 guidance, which we expect will complete the return to the pre-pandemic multiple range and significant downside in the shares.
Valuation
Prior to 2020, TDOC had never traded above 7.0x EV/NTM Sales. Following the new emphasis placed on telemedicine by its accessibility during COVID-19 lockdowns, the stock pushed to its current level (and subsequent all-time highs) of 7.5x to 16x. Based on a lack of conversions to chronic care and the potential floor of the existing Teladoc platform, we have modeled 2021 revenue in-line with consensus of $2.103B and a miss 2022 revenue of $2.381B versus consensus of $2.591B. Utilizing the midpoint of its pre-COVID historical trading range, we expect 15%-30% downside from the current price with potential for further downside in the out-years following poor performance in the near-term. We don't see the downside in 2022 as a temporary problem, but one that gets worse over time and widens the gap between our model and consensus.
Catalysts
- App Downloads and Daily Active Users | Internally, we maintain app download and active user data for Legacy Teladoc and all of its acquisitions. Although we know these metrics will likely be tamped down during the back half of the year due to the seasonality of the selling season, we will continue to monitor them regularly for a pick-up across any of the company’s key businesses.
- 3Q 2021 Earnings Report and Call | As we have previously mentioned, Teladoc is in the process of finding the “right story” to tell investors. Since February of 2021, the potential for that story to play out successfully has been called into question by investors. We believe further inability to deliver short-term success will further unravel the future success of the entire offering.
- FY 2022 Guidance and Outlook for Business | When Teladoc gives their FY 2022 guidance and outlook for the business in February 2022, it could be vastly different from that given in 2021. While we do believe many aspects will remain the same, will it be enough to captivate investors in a post-emergency stage of COVID-19 environment?
Risks
- BetterHelp + myStrength Complete Fits Need | As we noted in our thesis, we have heard the benefits administrators have shifted their focus from chronic care enrollment to mental health solutions for the time being. Along this same timeline, Teladoc’s BetterHelp, a DTC mental health solution, has picked up a growing number of daily active users; and myStrength Complete has successfully rolled out it’s B2B mental health offering. If the combination proves not to be a late entrant to the fray, the duo could prove to be an effective, higher-ticketed approach to growth fitting exactly what patients are seeking.
- Chronic Care Management Returns to Favor | Although we feel confident in the market analysis we completed to define the US employers who would “fit the bill” of a Livongo customer, a shift in the prioritization of chronic care management would certainly add value to Livongo’s growth prospects. Although we have our concerns on the prestige of the equipment, we know that Livongo’s brand name is enough to place them in the meeting.
- Lagging International Market Could Benefit from “Doc-in-a-Box” | While we know that the digital health matrix has drastically shifted in the US (Legacy Teladoc and Livongo do not rank well) and much of TDOC’s US runway has been depleted, a difference in technological landscape abroad could be an area of focus for Teladoc going forward. In the 4Q20 Earnings Call, management did emphasize an opportunity here.
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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