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3 Reasons to Be Bullish on Teladoc After Its First Quarter

By David Jagielski – May 8, 2020 at 10:45AM

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The leading provider of virtual health services has understandably been a hot stock in 2020. Can its star keep rising?

Teladoc Health (TDOC -3.35%) is a stock that's had no trouble this year attracting investors, who have turned to social-distancing stocks and companies that are resilient in the COVID-19 pandemic. Teladoc's virtual healthcare services make it an ideal option because while global shutdowns have hurt operations for many other companies, it's helping Teladoc grow.

That's exactly what investors saw when the company's first-quarter 2020 results were released April 29, providing three reasons for optimism.

1. Teladoc continues to generate strong sales

In Q1, revenue was up 41% from the prior-year quarter. That's significantly better than the 27% growth in the fourth quarter and the 32% increase for the full year 2019.

The company had excellent growth in its subscription access fees, which rose by 29%, or $31 million. Revenue from actual visits saw a larger percentage increase, growing by 93% from the prior-year quarter to $43.7 million. 

Stethoscope on a laptop.

Image source: Getty Images.

As a percentage of revenue, subscription access fees made up 76% of all sales during this past quarter. A year ago, that percentage was 82%. That's a good sign since it shows the company is becoming less dependent on subscriptions versus pay-per-visit revenue. Subscriptions, however, can be stronger and more consistent sources of recurring revenue as they're related to enterprises and can cover many employees on an ongoing basis. Patients, meanwhile, pay visit fees which may be convenient and flexible for them, but they don't provide Teladoc with the same level of continuity and consistency that subscriptions do.

But as people need more flexible healthcare options that don't require health insurance, especially for workers who have been laid off due to the COVID-19 pandemic and no longer have health coverage, pay-per-visit sales may continue to be a stronger source of revenue for Teladoc. Companies typically contract out Teladoc's services for their employees on a monthly basis, but people without health insurance can still access Teladoc's services starting at $75 for a virtual doctor visit without the need for a subscription. 

Teladoc needs to keep growing its sales to improve its bottom line. The company has posted a loss in every year since its inception. In Q1, Teladoc reported a loss of $29.6 million, which was only marginally better than the $30.2 million loss it incurred in the same period a year ago. 

2. Subscriber growth remains over 60%

Another sign that things are going well: More corporate clients are signing up for the company's services. Teladoc's U.S. paid memberships totaled 43 million on March 31, a 61% increase from a year ago. That's in line with the level of growth it saw for all of 2019, as paid memberships for the full fiscal year were also up 61% from 2018.

On the company's earnings call, CEO Jason Gorevic said that there could continue to be strong demand for Teladoc's services: "During the first quarter alone, we onboarded over 6 million new paid members in the U.S. across government and commercial populations. And we anticipate onboarding an additional 6 million to 7 million new members during the second quarter, culminating in the strongest first-half membership growth in company history."

With continued growth among businesses and government organizations, Teladoc's demonstrated that there's strong demand for its services even amid the pandemic. And with more memberships, the company's stream of recurring revenue will only get stronger.

3. Cash flow is improving and should not be a problem

Given the uncertainty with COVID-19, cash flow is a pressing need for many companies. Those that are generating and conserving positive cash flow are much safer buys. They'll be less dependent on cost-cutting and on issuing new shares to stay afloat.

The good news for Teladoc investors is that the company is moving toward being cash flow positive. In Q1, it used up $6.3 million to fund its operating activities, compared with $7.9 million in Q1 2019. Although it's a modest improvement, it's still a very good sign since many companies see their cash burn rise as they continue to grow, which isn't the case with Teladoc.

Teladoc's cash and cash equivalents totaled $508 million on March 31, which is more than enough for its current level of cash burn. Even if Teladoc were to run into adversity, it has a healthy cash balance that can easily accommodate any challenges relating to COVID-19.

Is Teladoc still a good buy?

The only argument against buying the healthcare stock today is that it's already climbed 109% since the start of the year. It's trading near all-time highs, and investors are paying around 20 times sales to own a piece of the company, considerably higher than the multiple of nine a year ago.

But with remote health services seeing more demand now than a year ago as a result of the pandemic, the stock is likely worth a higher premium. And considering the company still expects more growth, there's no reason to believe that Teladoc's numbers have peaked. Although the stock has a high price, it's still a good buy and may even be a bargain a year from now. When things are going well, as they are with Teladoc Health, a stock will understandably continue hitting new all-time highs, so that shouldn't be a reason not to invest in it.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Teladoc Health. The Motley Fool has a disclosure policy.

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