We came across a bullish thesis on Teladoc Health, Inc. (TDOC) on Substack by Market Musings. In this article, we will summarize the bulls’ thesis on TDOC. Teladoc Health, Inc. (TDOC)’s share was trading at $9.50 as of Feb 27th.
A telehealth professional in a lab coat wearing a headset and talking to a patient through a tablet.
Teladoc Health (TDOC) is undergoing a major transition as its two business segments—Integrated Care and BetterHelp—diverge sharply in performance. Integrated Care, which provides virtual healthcare solutions to employers, health plans, and providers, is growing steadily, with membership increasing 4.1% year-over-year. It now accounts for 59% of total revenue but an outsized 76.5% of adjusted EBITDA (AEBITDA), reflecting its strong profitability with a 15.8% margin. BetterHelp, on the other hand, is struggling, with paying users declining 13.3% year-over-year, leading to revenue and AEBITDA losses on both a sequential and annual basis. This stark contrast between the segments suggests a “Good Co./Bad Co.” dynamic, where one side of the business is thriving while the other drags down overall results.
The company’s actions indicate it may be effectively giving up on BetterHelp. In Q2 2024, TDOC pulled its segment guidance and has yet to reinstate it, signaling that management expects continued declines. This aligns with recent financials, where BetterHelp was responsible for all revenue and AEBITDA losses. Year-over-year, Integrated Care increased revenue by $10 million and AEBITDA by $5 million, while BetterHelp lost $29 million in revenue and $11 million in AEBITDA. The net effect is clear: TDOC’s financial struggles are entirely due to BetterHelp, masking the strength of Integrated Care. Interestingly, competitor Talkspace (TALK) has seen revenue and AEBITDA growth, disproving TDOC’s claim that BetterHelp’s weakness is due to macroeconomic headwinds and weak consumer spending. This suggests TDOC’s problems with BetterHelp are more company-specific than management acknowledges.
Despite BetterHelp’s struggles, Teladoc is making strategic moves to reinforce its stronger segment. The acquisition of Catapult Health, a preventive care platform, suggests a commitment to bolstering Integrated Care. However, with only $30 million in trailing twelve-month revenue, Catapult is unlikely to be a transformative addition. TDOC paid $65 million for Catapult, or about 2x price-to-sales, compared to its own valuation of 1x P/S. This raises the question of whether the capital could have been better allocated to share buybacks or other investments.
From a valuation perspective, Teladoc’s improving net income trends, despite stagnating revenue growth, suggest the worst of its financial woes may be behind it. The company has significantly improved its net income position following its costly Livongo acquisition, with a series of write-downs helping to reset expectations. Stock-based compensation, while still high at 6.4% of revenue and half of free cash flow, has been declining. TDOC now trades at 1x EV/S and 8x EV/FCF, with free cash flow growing 24% year-over-year. While headline revenue growth remains weak, underlying profitability is improving, positioning the company for a potential rerating.
Investors who recognize the shift occurring within Teladoc may see an opportunity. As BetterHelp shrinks, its negative impact on financials will fade, allowing Integrated Care’s strength to become more apparent. The market may not fully appreciate this dynamic, as stagnant overall revenue growth could mask the improving quality of earnings. With TDOC’s stock having rebounded nearly 100% from its lows, some investors may already be catching on. If management continues to focus on Integrated Care and finds a way to stabilize or divest BetterHelp, the company could see a significant multiple expansion. In the meantime, patient investors may find an attractive entry point in a business that is fundamentally stronger than headline numbers suggest.
Teladoc Health, Inc. (TDOC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 32 hedge fund portfolios held TDOC at the end of the third quarter which was 32 in the previous quarter. While we acknowledge the risk and potential of TDOC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TDOC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.