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I Like Teladoc Stock, But Not at This Price

Luke Lango

As the telemedicine field has exploded in popularity over the past few years, the shares of America’s leading telemedicine provider Teladoc (NYSE:TDOC) have exploded higher, too.

Source: Piotr Swat / Shutterstock.com

In mid-2016, Teladoc had about 15 million members. The company had about 200,000 visits per quarter, and TDOC stock was trading at $10. Today Teladoc has 35 million members. The company just reported over 900,000 visits last quarter. And Teladoc’s share price has jumped to $100.

In other words, Teladoc has grown by leaps and bounds over the past three and a half years, and as it has, the value of Teladoc stock has risen ten-fold.

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That’s impressive But, can the red-hot rally of TDOC stock continue?

In the long run, it can. But over the next six to twelve months, the rally may take a breather. Telemedicine is the future of everyday consumer healthcare. Teladoc is poised to become the biggest company in that space. Over the next three to five years, Teladoc will deliver huge revenue and profit growth, and that growth will power Teladoc stock higher.

But, in the near-term, valuation concerns are a major problem for TDOC, more so than in the past. Over the next few months, I think TDOC stock will have a tough time shaking off these valuation worries, and I think the shares will be range-bound until the company’s fundamentals catch up with its valuation.

Telemedicine Is the Future

Telemedicine has been around for a while. It’s all about digitizing the healthcare process; instead of going to a doctor’s office for a check-up, patients can receive medical treatment and advice through a call/text/video chat. The core idea behind telemedicine is no different than the core idea behind e-commerce or streaming TV. Specifically, at the end of the day, if consumers can do something at home just as well as they can do it somewhere else, they are ultimately going to do it at home.

The problem, however, is that telemedicine didn’t quite live up to that promise. Online doctors simply have not been as effective as visits at doctors’ offices. There are various reasons for that, including  a low number of doctors available through telemedicine, telemedicine’s communication barriers, and the lower ability of remote doctors to provide diagnoses without examinations.


That’s all changing today.

Just like e-commerce had its breakthrough when shipping times started shrinking to a few days. Just like when streaming TV had its breakthrough when streaming content became as good as linear content. Today telemedicine is having its big breakthrough thanks to increased participation by  physicians as well as robust improvements in communication technology and data analytics.

Following their big breakthroughs, e-commerce and streaming TV went on to take over the world. Telemedicine, which at present accounts for a small fraction of total medical visits, will follow in their footsteps. That’s why I believe  these estimates which predict that the global telemedicine market will grow 15%-plus annually for the next several years, at least.

Teladoc Will Be a Winner in the Long-Term

The telemedicine market will grow tremendously for the next several years as consumers begin to routinely use it when they have a health issue. That is great news for Teladoc.

In simple terms, Teladoc is the wold’s largest telemedicine provider, and in this market, size matters.

Teladoc has over 35 million paying members,  a large number of  huge corporate accounts, and telehealth solutions for every type of medical issues. That’s crucial, not just because it shows how dominant Teladoc is in this space, but, more importantly,  because it illustrates Teladoc’s network effects. In fact, network effects are the company’s competitive advantage.

The many patients on Teladoc produce a steady demand for doctors, so many physicians join the service. The more doctors flock to the platform, the lower waiting times will be for patients, and the better medical outcomes will be. The high number of doctors and the positive outcomes enables the service to attract more patients, which will entice more doctors to join the service.

This virtuous growth cycle will enable Teladoc to grow rapidly over the next several years. That higher growth should ultimately drive Teladoc stock higher in the long-run.

Teladoc Stock Is Pricey

Although Teladoc stock will be a winner in the long-term, its shares are very expensive.

Teladoc still isn’t profitable. It’s poised to be unprofitable in each of the next two years, too. And yet, TDOC stock still trades at a rather absurd forward sales multiple of ten.

Sure, some of that premium is justified because of the company’s growth. But in Q3,  its revenue rose a not-that-impressive 24% year-over-year. Further, analysts, on average, expect its top line to climb just 20%-25% in each of the next two years. Again, that’s good,  but it’s not great. It’s certainly not high enough to warrant a forward sales multiple of ten for a company that’s unprofitable.

I’m incorporating some aggressive assumptions into my long-term estimates for Teladoc. Among these are:  1) sustained 20%-plus revenue growth over the next five-plus years, 2) gross margin stabilization in the 70% range despite increasing competition, 3) significant profitability boosts from 20%-plus revenue growth and 10%-20% expense growth, and 4) huge adjusted EBITDA margin improvements to over 20% by 2025, from about 3% last year.

Even under those aggressive assumptions, I can’t wrap my head around a $100 price tag today.  I think Teladoc ‘s earnings per share could reach $3.50 by 2025. Based on a forward earnings multiple of 35 — which is about the medium-term average for application software stocks — and a 10% annual discount rate, that implies a 2020 price target for Teladoc stock of under $90.

The Bottom Line on TDOC Stock

Telemedicine is the future. Teladoc stock is a long-term winner. And Teladoc stock has an extremely high valuation.

After assessing those three truths, I think the game plan now is simple: Investors should wait for the euphoria towards Teladoc to cool off, causing the shares to drop. Then they should buy Teladoc stock and hold it for the long-haul.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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