The main issue with Teladoc Health (TDOC) is that the virus crisis won’t last forever. The telehealth concept will only garner more traction going forward, but the company will face tough comps next year. My investment thesis remains bearish on Teladoc Health as the merger with Livongo Health (LVGO) closes with the stock up nearly 150% in the last year.
Image Source: Livongo Health website
A big key with the recent addition of InTouch Health and the future addition of Livongo Health is for investors to not get caught up on reported growth. What ultimately matters for value creation is organic growth. Unfortunately these days, corporations don’t report pro forma results to provide a clearer picture of organic growth.
For Q3, Teladoc Health reported impressive revenue growth of 109%. The organic growth rate were still impressive, but the growth rate was down at 90%.
The virtual health provider did an excellent job of maintaining telehealth visits at an elevated level in a period where visit volumes normally dry up. Though, a lot of questions exist on whether these gains are sustainable. Without a vaccine, patients were still reluctant during Q3 to enter medical facilities for routine care, especially high-risk vulnerable patients.
In addition, areas of high growth, such as mental health services, aren’t as likely to see the level of demand next year as during a period where the world constantly faces pandemic fears. So, while the market was caught up on substantial growth this year, Teladoc Health had to pay a massive premium to acquire Livongo Health.
As a reminder, the deal involved Teladoc Health paying 0.592 shares plus $11.33 per share in cash for each share of Livongo Health. The deal had an original enterprise value of $18.5 billion.
Livongo Health had 117.6 million diluted shares outstanding at the time of the merger. The deal conversion involves issuing 69.6 million Teladoc shares and paying Livongo Health shareholders $1.33 billion in cash.
The deal adds ~$13.9 billion to the market cap of Teladoc Health. The deal value is down substantially from the original merger, when the stock price was nearly $250 whereas the current price is below $200.
The combined merger has 150 million shares outstanding, for a valuation of $30 billion at a $200 stock price. With the $1.33 billion cash payment, the balance sheet is no longer impressive.
Ultimately, the investment story is about organic growth. Analysts have Teladoc Health and Livongo Health generating the following revenues estimates somewhat updated after the big Q3 beats for both companies last week.
Accounting for the merger forecast for $500 million in revenue synergies by 2025 and $100 million following the second year after the merger close (2022), the combined entity revenue targets are as follows:
- 2020 – $1.391 billion ($0 million synergies)
- 2021 – $1.991 billion ($50 million synergies), 43% growth
- 2022 – $2.670 billion ($100 million synergies), 34% growth
- 2023 – $3.430 billion ($150 million synergies), 28% growth
Again, Teladoc Health has an analyst forecast of only reaching 2022 revenues of $2.5 billion, yet the stock already trades with a market valuation of $30 billion. Currently, the stock trades at a market value of 15x 2021 revenue targets even including a $50 million boost from revenue synergies.
My biggest issue is the tough comps for the business in 2021. One only needs to look at the Twitter (TWTR) dip following weak Q3 daily users to see the issue Teladoc Health could face with tough comps next year.
This year, Teladoc Health has seen the following growth rates in quarterly visits:
- Q4E visits: 2.9 million, up 174%
- Q3A visits: 2.8 million, up 206%
- Q2A visits: 2.8 million, up 203%
- Q1A visits: 2.05 million, up 92%
In the past, peak virtual visits occurred during Q4 each year, but Teladoc Health is only predicting a minor bump from the elevated Q2/Q3 visit levels a month into the quarter. While a substantial number of visits in the last few quarters are now permanent virtual patients, the market is valuing the stock based on substantial growth in the next year when the inevitable pull forward issue will hit visit numbers.
As an example, under a normal market scenario, Teladoc Health would’ve been happy with 50% visit growth in Q3 of 2020 and 2021. Instead of 206% visit growth last quarter, the company would’ve seen the 2019 visit total of 928K jump to only 2.1 million visits next year in a normal situation. The big question remains as to whether Teladoc Health can top the 2.8 million virtual visits next Q3 due to the tough comps where visits aren’t likely repeated next year under a scenario where a vaccine exists.
And yes, Teladoc is paid mostly by member access fees and not visit fees, but the stock will trade off the trend in visits. Livongo Health is paid based on virtual chronic management membership fees. Again, some of the virtual care benefits could wane next year without COVID-19 in full force with lockdowns.
The key investor takeaway is that the combination of Teladoc Health and Livongo Health could very well be in the future of virtual care with the combination of virtual doctor visits and chronic care management, but investors are paying aggressively for a stock with demand pulled forward in 2020. Without a repeat of these massive 100%+ growth rates in 2021, the stock isn’t going to hold $200. Investors should wait for a further pullback in Teladoc Health before making a long-term investment.
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Disclosure: I am/we are long TWTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.