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Teledoc Health - What Happened, What Next?

1 Peter Chapter 3 verse 15 states, "But in your hearts revere Christ as Lord. Always be prepared to give an answer to everyone who asks you to give the reason for the hope that you have. But do this with gentleness and respect."


I think far too often Christians get a bad wrap because the holier than thou attitude is a problem. Any Christian that thinks that they are better than anyone is clearly wrong. I like the verse above as it teaches us to be bold, but do so with gentleness and respect. I believe that Jesus Christ is Lord. I don't need to force this upon anyone and respect is important, as is courage, as is integrity, and as is discernment.


These are also important when it comes to dealing with pressures associated with investing. In today's world, social media and discourse through the Internet is no picnic. In many ways it can be a negative leading to extreme emotional reactions. No one likes to feel extreme pressure, so keeping a focus on the words of God are very refreshing and helpful in dealing with all of life's circumstances, of which investing is simply one of them.


Topic

TDOC witnessed an epic SP drop on Thursday and has since dropped form its peak during January 2021 near $265 to below $35 per share, a near 90% decline. There are two things I don't like about TDOC - their premium purchase for Livongo Health, and their Net Debt position as a result of this. Most analysts have turned sour on TDOC as analysts typically do after-the-fact, but for investors, the key questions are what happened, and what next.


Key Takeaways



  • Negative revisions to Revenue expectations from management during calls always hurt and TDOC got the raw end of the deal Thursday on this.

  • Specifically - for the D2C mental health market, higher advertising costs in some channels are generating a lower-than-expected yield on marketing spend.

  • And - In the chronic condition market, TDOC is seeing an elongated sales cycle as employers and health plans evaluate their long-term strategies to deliver the benefits and care that their populations need.

  • In summary, TDOC lowered Revenue guidance which has caused concerns regarding their future.

  • The key focus for investors is valuation and growth potential, also known as risk/reward.


What Next


It's pretty simple here. While most analysts basically regurgitated what TDOC management stated and adjusted their PTs more in-line with the drop towards the low $30s, TDOC's growth prospects didn't really change much. The irony is that TDOC may still see an annualized Revenue growth rate near 20% over the mid-term. For me, the key is focusing on the potential for Cash Flow to inflect as the business model scales.


Today, TDOC is trading less than 3 times EV/Sales and 30 times OCF/Share. Per the chart above, TDOC has never come close to trading at these levels. However, one could argue that TDOC's growth has never slowed to the anticipated average over the next five years. But TDOC scale is now in an entirely different level. Nonetheless, the need to focus on Cash Flow is paramount. TDOC has proven at north of $2 billion an OCF margin at or near 10% is achievable. The question is, can this double as the company scales towards $5 billion and beyond. I believe that it can.


Is TDOC worth 8-10 times EV/Sales, 5-8 times, or 3-5 times? Is TDOC worth 40 times OCF/Share, 25 times, or 15 times? These scenarios of valuation are what is going to make or break investor returns, as the company performs over time. The bottom line is if TDOC hits $5 billion in Revenue by 2026 with $1 billion or so in OCF, the SP is likely to be trading towards $150, or even higher. Legacy investors with a cost basis at $75 or lower are in good shape here, as are any newer investors looking to initiate.

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