Teladoc Health (TDOC): A Long-Term Play on Telehealth
Many are surprised to learn that the concept of telehealth wasn’t a direct result of the Covid pandemic in 2020. Indeed, the practice of online consultations between patients and medical personnel has been practiced for over 20 years, and this month’s featured company is arguably the first one to bring it to global prominence.
The company of interest is Teladoc Health (TDOC), a New York-based provider of telephone and video conferencing consultations between licensed medical professionals—including U.S. board-certified doctors and nurse practitioners, dermatologists, psychiatrists and other health experts—and everyday customers.
Telehealth has technically been around for decades; really, it started with the advent of the telephone in the late 1800s. But its current incarnation began shortly after the widespread adoption of the internet in the 1990s. Teladoc is recognized as the first and largest provider of telehealth medical consultations in the U.S. after its launch in 2002, at which time it was widely regarded as a novel delivery method.
Its main services include telehealth (mostly medical opinions), but it also offers telehealth devices and other licensable platform services and analytics. Consultations are made using either telephones or videoconferencing software, and Teladoc also offers mobile apps to provide on-demand remote medical care. Using the phone or video chat service, Teladoc doctors can diagnose and treat minor illnesses, allergies and skin conditions, and they can also prescribe medication if necessary (which can be obtained at the nearest pharmacy).
It goes without saying that the Covid pandemic resulted in a dramatic increase in the use and reliance upon telemedicine and videoconferencing for the provision of health care. According to the U.S. National Center for Health Statistics, 79% of hospitals connected with patients using some form of telemedicine last year, while 37% of individual patients made appointments with physicians via telehealth as recently as 2021. And it’s hardly surprising that the industry consensus is that reliance on remote medical diagnosis will only increase in the years to come.
A major factor driving the anticipated growth of telemedicine is the nation’s shifting demographic landscape. As the number of elderly Americans increases, health officials forecast that healthcare spending will outpace the growth of the general economy—a key catalyst for the long-term telehealth growth thesis.
According to projections from the Centers for Medicare & Medicaid Services (CMS), healthcare spending in the U.S. is expected to approach a whopping 32% of gross domestic product (GDP) by 2032 (versus the current 18%). Moreover, CMS has found that nearly 4.2 million Medicare patients used telehealth services in the first quarter of 2022 alone, which it notes is a “reflection of the increasing reliance on remote care among seniors.”
Moreover, medical insurance provider Now Health International has offered some additional insights into the stunning growth of telehealth, particularly among Millennials. According to a Now Health survey:
- 80% of people have accessed care via telemedicine at least once in their lives.
- 74% of Millennials prefer teleconsultations to in-person appointments.
- 96% of telepsychiatry patients are satisfied with virtual mental healthcare.
- 60% of patients found telemedicine more convenient than in-person health appointments.
- Telemedicine adoption grew 44% between 2015 and 2019.
The latter statistic highlights that, especially among Millennials, the adoption of telehealth was actually well underway even before Covid’s arrival in 2020. And the latest statistics suggest that the embracement of telehealth among the younger generations (including Gen Z) has only increased since then.
Granted, America’s older generations have been slower to adopt telehealth vis-à-vis the younger crowd, but that trend is rapidly shifting. According to a December 2023 PYMNTS Intelligence research study, 64% of Boomers and seniors are “actively engaged with digital healthcare activities, which includes nearly two-thirds who have participated in digital healthcare activities in the past year.” The study concluded that telehealth use has increased “significantly” among Boomers since 2019, driven in part by the pandemic.
All told, the future growth of telehealth is expected to be driven by a combination of America’s aging Baby Boomers, who are somewhat lagging in their adoption of the online health platform, and the younger Millennial and Gen Z population, which have more readily embraced it. And as more potential customers begin to recognize that telehealth is less invasive and more cost effective than in-person medical appointments, that trend is poised to accelerate.
This brings us to the question of where exactly does Teladoc Health fit into the overall healthcare picture? A bit of background is in order before answering this question. After its inception in 2002, the company’s initial business model allowed patients to remotely consult with licensed doctors at any time. Corporate members paid a monthly fee for their employees to access the service, while individual patients paid a flat fee for each consultation (originally around $40).
By 2005, Teladoc had gained a much larger national presence and ended up garnering a million members two years later (including large employers like AT&T). Shortly after 2011, major insurance providers like Aetna began offering Teladoc for its members in all 50 states.
Over the last decade, Teladoc has embarked on a major acquisition spree, starting with the 2013 purchase of Consult A Doctor, followed by AmeriDoc in 2014—two of its biggest competitors. This paved the way for Teladoc to become America’s largest telehealth provider by 2015, the year in which the firm went public (with an IPO offering of 19 a share, which gave the company a market cap of $758 million and an enterprise value of $620 million at the time).
Around that same time, the Affordable Care Act (ACA) led to a large number of insurance providers and major enterprises signing with Teladoc, which proved to be a major stimulus for the firm’s growth in 2014 and beyond.
In recent years, the company has continued to grow its footprint via acquisitions, including the 2017 purchase of medical consulting firm Best Doctors, global virtual care provider Advance Medical in 2018, and digital chronic care management providers InTouch Health and Livongo Health, both in 2020.
As it now stands, the company remains the dominant player with the largest market share (currently 6%) in this burgeoning field and is active in over 175 countries, with nearly 6,000 global employees. It expects to have around 95 million U.S. Integrated Care members for the full year of 2024, an increase of 5% year-over-year. (The Integrated Care app combines all of Teladoc’s services into one place, including: primary care, mental health, chronic condition management, virtual visits with physicians and care coordination with in-person doctors.)
Teladoc divides its business into six segments: platform and program services, guidance and support, expert medical services, mental health services, telehealth and integrated virtual care. To simplify its service offerings, last year it launched a new app that comprehensively offered all its services and programs in one central place for all members and clients.
The firm’s main expert medical and telehealth services allow the company’s 7,000 licensed care providers to prescribe medication remotely, and they also have the ability to recommend emergency room visits in extreme cases. According to the company, for the issues it sees, 92% of its users get their medical issue resolved the first time without having to have a follow-up. It should be noted that this is a very impressive statistic within the overall industry.
As you might expect, the firm’s heyday was during the pandemic years, at which time it experienced a massive boom in popularity due to shutdowns and protocols that restricted in-person medical visits. Teladoc’s revenue doubled to over $1 billion in 2020 as virtual care visits soared that year, with the telehealth provider delivering some 11 million virtual visits that year (up 156% from 2019). The company’s domestic paid membership in 2020, meanwhile, reached an eye-popping 52 million (up 41% year-on-year).
The growth continued to be impressive into 2021, with revenue increasing 81%, to $2 billion, for that year. But as the pandemic began winding down, the subsequent year saw a drastic decline in the annual sales growth rate, with revenue for 2022 and 2023 coming in at $2.4 billion and $2.6 billion, respectively. As the company’s growth prospects declined, the shares fell out of favor, dropping from a 2021 high of around 300 before hitting a record low at 6.70 this past August.
One reason for Teladoc’s fall from grace was the emergence of competition in the virtual care space in the pandemic’s immediate aftermath. Most notably, retail giant Amazon has entered the arena by combining a virtual care clinic service with its recently acquired One Medical, its virtual and in-person primary care offering.
To address these and other challenges, Teladoc brought in a new turnaround CEO in June, Chuck Divita, who replaced the outgoing CEO Jason Gorevic. Divita is a former insurance executive who previously worked at GuideWell, the holding company for Blue Cross Blue Shield insurance companies, and his reputation is that of an innovative, results-driven leader in the healthcare industry. His background demonstrates that he has the ability to create breakthrough strategies and help drive transformational growth.
The company’s turnaround plan is predicated on successfully addressing several points of interest, including offering improved products and placing greater emphasis on chronic disease management. It also plans to reduce costs and improve profit growth by cutting expenses and restructuring (it’s guiding for pre-tax expenses to be reduced by around $43 million for this year). The firm is further targeting 50-to-100 basis points of annual margin expansion over the next three years. And it plans to dramatically increase its customer reach outside the U.S. as part of a major global expansion push.
On the latter front, Divita mentioned in the latest earnings call that the firm’s International Integrated Care business is gaining “strong momentum through geographic expansion and market penetration and added services to existing customers.” Teladoc also reported important wins in several foreign markets, most notably Canada, and it expects to further invest in its International Integrated Care business as a “core priority” going forward. And as the following chart illustrates, the international business is where Teladoc has seen a big part of its revenue growth in the last several quarters.
Meanwhile, in its primary U.S. market, Teladoc’s management sees prevailing high medical cost trends and other pressures offering a pathway for growth as more potential customers expect “more value from the broader healthcare ecosystem, including from virtual care.”
In recognition of the initial steps Teladoc has taken toward turning its business around, a major Wall Street investment bank has just started coverage of the company with a “Buy” rating. The rating was based in part on the bank’s assessment that Teladoc’s turnaround strategies “should lead to continued membership and revenue growth while a better targeted BetterHealth strategy will lead to growth in 2026,” thanks in part to its increased focus on the chronic care segment.
I concur and see Teladoc as a worthwhile turnaround prospect for participants with a six-to-12-month timeframe.
Recommendations
Purchase Recommendation: Teladoc Health (TDOC)
2 Manhattanville Rd.
Purchase, NY 10577
Web Site: https://www.teladochealth.com/
Symbol: TDOC
Market Cap: $1.8 Billion
Category: Small-Cap
Business: Healthcare Provision
Revenues (2024e): $2.6 Billion
Earnings (2024e): NA
12/17/24 Price: $10.70
52-Week Range: $6.75-$22.55
Dividend Yield: N/APrice target: $16
Background:
As mentioned above, TDOC came public in 2015 at 19 a share and, after the typical post-IPO rally and subsequent drop in the months that followed, the stock finally found its legs in 2016. Later that year and into 2017, it commenced a steady climb that resulted in a “blow-off” rally in 2018, followed by a sharp pullback into the following year.
But the pandemic year of 2020 is when TDOC really hit its stride, as the stock started strengthening almost immediately when the year began. Starting from around 50, shares soared to a pandemic-era high of around 300 by early 2021 before running into strong resistance and losing steam.
The air came out of the proverbial tires after that, as TDOC spent most of the next two years in collapse mode. The crash temporarily ground to a halt last year as bottom fishers took an interest in the stock, but a final drop in the first half of 2024 flushed out what was likely the last of the “weak hands” as it established a solid-looking low in August around 6.70 a share.
I consider TDOC to be an early-stage turnaround with the added benefit of a decent buildup of forward momentum in the last couple of months (one of my personal favorite set-ups for initiating a new long position since it makes it easier for new buying interest to push shares higher with less effort compared to stocks that are still bottoming). The window for this potential turnaround is roughly six-to-12 months, although the accelerated entrance of institutional buyers or other informed (i.e. “smart money”) interests could certainly abbreviate the timeframe of the projected share price rebound.
Analysis:
Much of TDOC’s turnaround thesis is predicated on the company taking advantage of its clear advantage in terms of name recognition as the leading telehealth provider, as well as its enormous economies of scale, as it anticipates being able to leverage its ~95 million U.S. members, plus a massive array of clinicians and insurance partners to achieve its objectives.
In its Q3 earnings report on October 30, the company reported mixed results as revenue of $640 million was 3% lower on a year-on-year basis, while EPS beat estimates. Furthermore, the bar has been set fairly low for when the company reports Q4 earnings in late February, as analysts expect a sharp drop in per-share earnings and another 3% drop in revenue (unchanged on a sequential basis), paving the way for another earnings beat.
Of significance, TDOC’s EBITDA is expected to stabilize in 2025, and analysts further expect to see multiple expansion in the coming quarters. Moreover, the company’s forward EV/EBITDA multiple of 6.7 is a key attraction and compares very favorably to the industry average of 13.1.
Free cash flow (FCF) is also expected to improve, as the company reported FCF of $79 million in Q3, up approximately 16%, while ending the quarter with over $1.2 billion in cash and cash equivalents on the balance sheet. (The company trades at a compelling 11x forward FCF by one estimate.)
Historically, TDOC has a 90% or better customer retention rate, and management believes contributions from new and existing customers will lead to increases in membership and visit volumes going forward. For 2025, the firm expects the International Integrated Care business will outpace overall segment revenue growth and sees the strong growth continuing into the next year, while also guiding for “strong” margin expansion.
The top brass further views 2025 as being an important repositioning year for the company as it executes against the strategic initiatives aimed at fully turning the business around. On that front, traction from its various initiatives including insurance acceptance, further international expansion and product enhancements should contribute incrementally, helping to diminish headwinds in the existing business and leading to greater stability in revenues on a sequential basis as TDOC progresses over the course of the next fiscal year while focusing on managing the top and bottom lines.
All in, the shares are undervalued as reflected by a number of metrics and should begin attracting more attention from investors as the company’s turnaround measures are fully integrated in the coming quarters. Accordingly, I’m recommending TDOC for purchase around current levels with an upside target of 16. BUY
Other Ratings Changes:
I recommend that we take an additional one-quarter profit in American Airlines (AAL). We took the first one-quarter profit on December 5 after it provided us with a 30% gain. The stock has since pulled back a bit after reaching a yearly high at 18, and it continues to act well. However, given the cyclicality of the airline industry, I think we should be judicious in taking profits while keeping a close watch on the stock’s near-term performance. HOLD
We took a one-quarter profit in Super Hi International Holding (HDL) on December 2 after its post-earnings rally, while downgrading the shares from Buy to Hold. I now recommend taking an additional one-quarter profit after the stock essentially reached our 27 target on an intraday basis on December 16, coming within a few cents of doing so.
As noted in last week’s update, the stability of the company’s revenues is impressive, and Wall Street analysts have recently updated their sales projections to reflect 15% growth for 2024, as well as 15% growth in each of the next two years.
Our total return on this position to date is 57%, and I suggest we let the remaining half of the position run, as further upside is certainly possible, but with an eye toward exiting if HDL falls under 23. HOLD
Performance
The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations. You can find more details by visiting our website at cabotwealth.com.
The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.
| Recommendation | Symbol | Rec. Issue | Buy Issue | Current Price | Total Return | Current Yield | Rating and Target |
| General Electric | GE | Jul-07 | 195 | 165.8 | -13% | 0.70% | Hold (210) |
| Berkshire Hathaway | BRK/B | Apr-20 | 183.2 | 455.2 | 150% | 0% | Hold |
| Brookfield Reinsurance | BNT | Jan-22 | 61.3 | 59.15 | -2% | 0% | Hold |
| Janus Henderson Group | JHG | Jun-22 | 27.2 | 44.15 | 65% | 3.50% | Hold |
| Agnico Eagle Mines Ltd | AEM | Nov-23 | 49.8 | 82.65 | 70% | 2.00% | Hold |
| Fidelity National Info Svces | FIS | Dec-23 | 55.5 | 83 | 55% | 1.70% | Hold (85) |
| Duluth Holdings | DLTH | Sep-24 | 3.9 | 3.35 | -14% | 0% | Buy (5.5) |
| Alcoa Corp. | AA | Oct-24 | 39.25 | 38.5 | -2% | 1% | Hold (50) |
| Centuri Holdings | CTRI | Oct-24 | 18.7 | 20.5 | 10% | 0% | Buy (24) |
| Atlassian Corp. | TEAM | Oct-24 | 188.5 | 278.1 | 48% | 0% | Hold |
| Super Hi International | HDL | Oct-24 | 16.7 | 26.25 | 57% | 0% | Hold |
| American Airlines | AAL | Oct-24 | 13.6 | 16.5 | 21% | 0% | Hold (20) |
| SPDR S&P Retail ETF | XRT | Nov-24 | 79.6 | 83.6 | 5% | 1.20% | Buy (88) |
| Starbucks | SBUX | Nov-24 | 99.25 | 93.15 | -6% | 2.60% | Buy (118) |
| SLB Ltd. | SLB | Nov-24 | 44.05 | 39.9 | -9% | 2.70% | Buy (55) |
| Toast Inc. | TOST | Dec-24 | 43 | 38.6 | -10% | 2.70% | Buy (70) |
| Teladoc Health | TDOC | Dec-24 | 10.7 | 10.7 | 0% | 0.00% | Buy (16) |
Most Recent Closed-Out Recommendations
| Recommendation | Symbol | Category | Buy Issue | Price At Buy | Sell Issue | Price At Sell | Total Return(3) |
| Intel | INTC | Large | Sep-24 | 22.8 | Dec-24 | 21 | -8% |
Notes to ratings:
1. Based on market capitalization on the Recommendation date.
2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.
* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.
** BNT return includes spin-off value in BAM shares.
*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.
**** Indicates a partial sell.
The next Cabot Turnaround Letter will be published on January 29, 2025.
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