Updated: Dec 23, 2022
A year ago, shares of Teladoc Health were riding on an all-time high investor sentiment, backed by the announcement of acquiring Livongo Health for $18.5 billion in a behemoth deal that was the third largest of the year.
Since then, TDOC stock has spectacularly come crashing down, making it worth only slightly more than the total amount it paid to acquire Livongo last year. Companies that see a drop in the stock like Teladoc are usually accused of fraud or are at the risk of going bankrupt. But the decline in TDOC stock has more to do with the current investor risk appetite than any single fundamental driver.
TDOC is a Frontrunner in a $175 Billion Market
As an early mover in the space, TDOC has reaped the benefits of the rapidly growing telemedicine industry, which is still in its infancy when it comes to potentially disrupting the global healthcare market.
Notably, Teladoc uses its mobile app, telephones and videoconferencing software to provide on-demand remote medical care. They can maintain market dominance and capture a substantial chunk of the Telehealth industry, which is estimated to be valued at $175 billion by 2026.
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Part of the company’s strategy is to consolidate market share within the industry through numerous acquisitions.
Since going public in 2015, the company has acquired BetterHelp ($3.5m), Stat Health Services ($30m), Healthiest You ($45m), Best Doctors ($440m), and Advance Medical ($352m).
Armed with the tailwinds from the pandemic, the Teladoc has rapidly scaled up since 2020, primarily with its two biggest acquisitions InTouch Health ($600m) in January 2020 and Livongo Health ($18.5b) in August 2020.
The strategy has paid off, with revenues growing rapidly and earnings improving materially.
But earnings haven’t translated to stock gains as TDOC stock has fallen from $220 to $130 in just one year.
So why has TDOC Stock seen a Decline?
Investors have shifted away from growth stocks (primarily technology companies) towards value stocks, amidst fears that growth companies will continue to lose money in the foreseeable future and a potential rise in interest rates would cripple the inflated valuations. TDOC had reported stellar Q2 results, with top-line growth up an incredible 109% YoY and 11.53% sequentially (vs. Q1).
Management has also increased revenue guidance from $2 billion to $2.025 billion. But TDOC stock has dropped nearly 15% from Q2 earnings, as investors were disappointed over the bottom line.
The company’s net loss widened in Q2 to $134 million, which was up over 4x compared to a year ago. TDOC’s earnings were penalized primarily due to stock-based compensations and the amortization of intangible assets, which accounted for around $130 million in Q2.
Apart from the fact that TDOC is losing money, investors are also worried about competitors Amazon and Walmart, who have the potential to disrupt TDOC’s virtual monopoly with network effects of their own. While the increased competition will no doubt be a concern for the company’s management, retail pharmacies like Walgreens and CVS should be more worried about the increased presence of Amazon and Walmart rather than Teladoc.
If events in the past are a precursor to the future, TDOC could even solicit a buyout from Amazon or Walmart given a reasonable valuation premium (Amazon’s largest valuation to date is Whole Foods at $13.7b and Walmart’s largest acquisition in Flipkart at $16 billion).
TDOC Offers a Discount on the Future of Global Healthcare
With the recent correction in TDOC stock, investors are presented with the opportunity to buy into the future of the global healthcare market at a significant discount.
TDOC stock is set for a breakout or be potentially acquired by behemoths Amazon/Walmart, who are looking to establish dominance themselves. Teladoc will see its top-line continue to grow at a blistering pace, its margins improve, and eventually break even over the next 5-6 quarters.
The stock should see a surge after Q3 results are announced on October 27th, with further upside depending on the trend in customer visits.
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