sin art creative
prologue
It seems to be a recent sentiment towards Teladoc Health (New York Stock Exchange: TDOC) is bullish among Seeking Alpha authors.
Seeking Alpha Creator’s Emotion (Seeking Alpha)
I’ve done some research and this is my view:
Paper abstract
I can’t see the fundamentals Teladoc’s bullish case for these reasons:
- growth is slowing
- Small TDOC incremental margin
- Unrealistic valuation assumptions are required to justify a purchase
growth is slowing
Slowing growth in subscription access fees
TDOC earns 86.1% of its total revenue from subscription access fees. This growth rate has slowed significantly over the last five quarters.
QoQ Growth in Subscription Access Fees (Company Filing, Author Analysis)
On an annual run-rate basis, growth is ticking at 20% year over year.
BetterHelp traffic growth slows
Teladoc’s primary revenue driver is its subscription-based consumer mental health and wellness app. Management also emphasized that BetterHelp will be his key growth driver in Q10 Q3 FY2022.
…revenue increased significantly due to additional access charges incurred by our member base. Most importantly, BetterHelp, a DTC mental health service.
However, BetterHelp’s website traffic growth is lukewarm, with less than 10% year-over-year growth, according to SimilarWeb.
BetterHelp’s Year-over-Year Website Traffic Growth (SimilarWeb, Author Analysis)
Ultimately, this calls into question the company’s growth execution.
Small TDOC incremental margin
Incremental profit margin is a key metric for tracking companies that have not yet achieved stable profit margins. Incremental margins indicate the long-term margin profile of your business. For TDOC, barring a few outlier quarters, we can optimistically assume incremental margins to be in the middle of the 20% range.
Incrementally Adjusted EBITDA Margin (Company Filings, Author Analysis)
My intuition says this is too low. But let’s prove it with numbers:
Unrealistic valuation assumptions are required to justify a purchase
The table below shows my simple investment calculation for TDOC.
Teladoc; simple investment calculator (company filings, author’s analysis)
Let’s start with a base of $100 in revenue today and then assume a very generous 30% year-over-year growth thereafter. Given his GAAP EBIT margin of -6.62% for the third quarter of 2022, the company has no doubts and believes it can increase its EBIT margin by 30%. Assume zero tax. The current P/S multiple is 1.86x. This means that his investment in one share today would cost $186 on a $100 earnings basis. The resulting insights are:
Forget about returns. Despite these highly optimistic assumptions, it will take more than six years for the investment in Teladoc to break even.
Therefore, I think Teladoc is a very risky investment. Unrealistic assumptions are required to justify a purchase.
How I could be wrong and why it doesn’t short
If animal spirits and irrational frenzy drive TDOC’s stock price, I could be wrong. But I doubt if this is sustainable. Given the almost cult-like enthusiasm for potential multi-baggers among many long-term growth investors, short-selling such popular stocks is discouraged due to short-squeeze risk. I hesitate.
I could be wrong too if a company carries out these very tough growth and incremental margin assumptions.The ball is in their court…
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I think Teladoc’s business model is broken. To justify that assessment, it’s well below the mark in terms of revenue growth and margins. I think Teladoc buyers misunderstand this.
