1 John Chapter 3 verse 18 states, "Dear children, let us not love with words or speech but with actions and in truth."
As I grow in my faith, I find myself continuing to see areas with there is a need for improvement in my life. I need to improve my ability to grow in Christ, so that I can better serve my wife and child, family, community and church, and so forth. What is truth? Truth is God's word and commands that should impact my life if I am truly seeking Him.
For investing, taking action has a different meaning. For me, taking action means I better be very serious and prudent if I am to have any chance at competing by building and managing my own portfolio. My time horizon is long (Lord willingly) so I do not need to be influenced by short-term concerns and market fluctuations. Nonetheless, I still need to ensure that the companies I am holding are tracking towards expectations for investment returns.
Teladoc Health, Inc. (TDOC) did exactly what the company needed to do both for 2021 performance, and for 2022 guidance. The company is a product of the current relentless punishment disregarding any assessment of valuation for leading aggressive growth players.
Am I being extreme, I don't think so as TDOC has never traded below 7 times EV/Revenue for its fiscal year end until now. Even in 2015, when the company generated only $77 million in Revenue, TDOC still traded with a higher premium. In some ways, companies like TDOC are being punished for achieving well beyond what anyone could have imagined during 2020/2021. And still from these exponential new bases, growth remains highly robust over the mid-term.
During late 2020, many on Wallstreet were calling for aggressive growth companies benefiting from the pandemic to see negative growth in 2021 before a return to a "normalized" growth trajectory. We know now that all of the strongest aggressive growth peers proved that wrong and continue proving the naysayers wrong.
To be honest, I wasn't entirely enthused when TDOC announced its deal to acquire Livongo Health, Inc. Two negative outcomes for me occurred soon-after. Frist TDOC witnessed a return to negative Cash Flow and second, the company witnessed its first ever Net Debt position. I was tempted to liquidate the position as I do not like to own weaker financial companies as evidenced by their B/S. But I held and accumulated further as I realized that the play for TDOC would be a return to positive Cash Flow through post-merger inflection, and an eventual return to a Net Cash financial position.
These two key focal points are already afoot as Net Debt has declined from the 2020 peak of just over $700 million to just above $350 million as of 2021 year-end. TDOC's OCF Margin has hit an all-time high at nearly 10% as well in 2021.
TDOC had a very strong 2021 year as the company witnessed a stark increase in Revenue including the Livongo deal. At the same time, GM improved, as did OCF. It should be noted that Adjusted FCF in relationship to OCF has declined, primarily a result of the post-deal increase in Capitalized Software Development Cost.
The other area to pay attention to is Working Capital. As TDOC's Net Income was reconciled, the company witnessed a strong increase in Cash Flow. However, for 2021, Working Capital was a negative drag. We should hopefully see improvement for Working Capital over the next couple years.
The key to TDOC's growth prospects are twofold; first is the growth in the company's overall Membership services, and second is the utilization penetration as evidenced by Visits. The company's acquisition of InTouch has led to its Platform-Enabled Sessions, which are anticipated to grow at a faster rate than overall Revenue, impacting Other Revenue.
For 2022, TDOC guided for key metrics to drive Revenue from 25-30%. I've taken a modeling approach towards the upper end and made my estimates over the mid-term as well. The key themes for me from these high-level results is that TDOC will be headed towards $5 billion in Revenue or higher and an improving utilization rate will afford the company to nearly double its OCF Margin. My justification for this is the company's prior history pre-acquisition of trending on a robust Cash Flow inflection path.
Prior to the pandemic TDOC was trading with an EV/Revenue multiple 45-90 percent higher than today. Post-pandemic, I believe that TDOC will see its multiple expand back towards the higher end of this, especially as the company continues to grow robustly from its accelerated pandemic base.
Naysayers continue to push the slowing growth narrative, as well as the usual increased cost and operating expenses concerns. But for me, I'm focused on the two key areas for all aggressive growth companies, Revenue and Cash Flow. I suspect that over the coming years, TDOC will see its Net Debt transfer to a stable and improving Net Cash position, while at the same time continuing to further scale its telehealth platform and services. I understand the market's frustration as newer and more innovative companies continue to take market share away from legacy areas. But it is getting tiring seeing negative sentiment desperately manufacture concerns that are weak and without basis.