How Teladoc Is Shielding Against Competition

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest earnings reports and news from the markets. They do a pre-earnings walkthrough of one of the big retailers out there. Also, a cloud business with strong growth ahead just announced its results, and the pair discusses a bankruptcy announcement, take some listeners' questions, and much more.

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This video was recorded on June 9, 2020.

Chris Hill: It's Tuesday, June 9. Welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Jason Moser. Good to see you, my friend.

Jason Moser: Hey, how are you?

Hill: I'm doing all right. We've got some retail; we've got some apparel; we're going to dip into the Fool mailbag; we've got some cloud software earnings to get to. We're going to start with Macy's (M 0.14%), because Macy's is scheduled to come out with their first-quarter report in a few weeks, but preliminary results out today, indicating Macy's loss is going to be a little smaller than Wall Street was expecting. They've also raised $4.5 billion in debt to help shore up the balance sheet. So, what do you think, Jason; it's a little better for Macy's, yes?

Moser: Yeah, it is better in the sense that they have bought themselves some more time. You know, we always talk about it, it's tough to use debt to get yourself out of debt. And some point down the line, Macy's is going to have to figure out how to reconcile that, but for now, this does buy them time, which is really what they need most of, and a very close second is shoppers, right? I mean, you go back a year from today, we were talking about Macy's and the challenges the business was facing well before the pandemic ever hit. At that point from 2015 on, top-line revenue that had fallen 11%, net income had fallen 33%, earnings per share were down 22%, and then they burned through a considerable amount of cash along the way; around 70% of their cash balance they burned through since 2015 as well.

So, I mean, this was a business facing a lot of challenges a year ago. Fast forward to today and clearly those challenges have only grown. We've talked about this with J.C. Penney for so long; does the world really need J.C. Penney? We can ask the same thing; does the world really need Macy's? I mean, I don't know if it really needs it. I do feel like maybe there's a bit more of a spot for Macy's in our retail landscape here. And I am hopeful that management is able to weather the storm, but it is going to be a monumental task going forward.

And, you know, we still don't know how this coming fall is really going to shake out. I mean, there is enough uncertainty, I think, in regard to what the fall season is going to look like here, as far as the pandemic goes. If we can get through the fall season with relatively mild conditions, this holiday season is going to be a pivotal time for Macy's, one where they can really capitalize. But for now, yeah, they bought themselves very valuable time.

Hill: They did. You raised a good point in terms of the timing, because we know that for a lot of retailers, the most important time of the year is the holiday season in December. Second most important is back-to-school shopping. We're going to, obviously, see the extent to which [laughs] schools open up, but that is an opportunity for Macy's, and hopefully they can take advantage of it.

But you just reminded me of the conversation we had last week on Motley Fool Money. We were talking about Dick's Sporting Goods, and sort of this idea of, someone's got to survive, right? I mean, all sporting goods stores can't go the way of Sports Authority, right? There's got to be one left standing; at least that's my thinking. And I'm wondering the same, sort of, thing about Macy's, like, it has more brand equity than J.C. Penney, they historically have done a better job of managing their footprint, managing their inventory, which is tough to do.

So, I'm not buying shares of Macy's, but it wouldn't surprise me if they were not only around in five to 10 years, but in better shape from a financial standpoint.

Moser: Yeah, I think that's a fair observation. I do feel like Macy's holds a little bit more status in the retail space than something like a J.C. Penney. I mean, it's a blessing and a curse to have that, sort of, anchor position in a mall environment. I don't think malls are going away. Look at something like Simon Property Group and their exposure to the mall segment of retail. I mean, you've got companies that are very good at what they do in managing those real estate portfolios and putting ideal tenants in those malls. I think Macy's falls into the category of one of those ideal tenants that they would want to see.

Yeah, I think that Macy's certainly can exist; I don't doubt that one bit. Maybe it's in a smaller form, maybe it's something where private equity comes and takes this thing out of the public markets. I mean, the public markets, while we love them, obviously, it's a great vehicle to growing wealth over the long haul for investors. I mean, it's a very [laughs] heavily scrutinized part of the world, right? That's sort of the downside for companies that go public is, now you have to be fully transparent and you have to bring all of the bad that comes along with the good.

And there can be a snowball effect. I mean, when a company like Macy's starts feeling a little pressure and they start finding themselves in a precarious position that can snowball; investors can be very unforgiving when it comes to that stuff.

But, yeah, I do see a world where Macy's exists, albeit in a probably smaller form. Whoever is going to be leading the company over the coming years, you know it's just going to be a monumental task, they will definitely earn their money.

Hill: Shares of Coupa Software (COUP) up 4% this morning. First-quarter profits for the cloud software company came in much higher than expected. Coupa also gave some pretty solid guidance for the rest of the fiscal year.

Moser: Yeah, that was really interesting, I thought. In a market where everybody is suspending guidance, Coupa, you know, they're out there offering guidance, and they actually raised the guidance when you look at it. This is a really neat business. I mean, the biggest risk to a business like this today, from an investment perspective, really is valuation. And it's still a young business, a new business, very modest cash flow numbers, it's still unprofitable. It trades at around 35 times sales, you know, which we've seen a lot of these software companies do.

But, I mean, the flipside there, it is growing like a weed. Management is targeting 30% annual revenue growth. I mean, this is a company that is still growing very quickly and they're pursuing a very big market. To give an idea of what they do, Coupa, it's in business sales management. Ultimately, they draw an analogy with Salesforce, in that Coupa is to business sales management as Salesforce is to customer relationship management.

And I think that's an apt comparison. And if you look at what Salesforce is today, the success that the business has had to this point, I mean, that's a flattering analogy. I mean, if you're Coupa, you like hearing that, because it gives you some optimism that you're making the right decisions there. And so, this business sales management focuses on helping businesses in procurement, invoicing, expense management.

And, you know, when I mentioned the biggest risk to the business on the side of the valuation, 35 times sales. And just to give you an idea of how different the market can view different companies -- OK, I'm not comparing Coupa to Macy's, obviously, it's apples-and-oranges, but Coupa at 35 times sales, Macy's is trading at about 0.1 times sales. So, that gives you an idea of the expectations [laughs] the market has for these different types of businesses. And so, we obviously like these software businesses and they are pursuing a big market, but you have to be careful with the valuations when it comes to them.

But they have tremendous network effects in play here. And one of the metrics that we pay attention to with this company quarter-in and quarter-out is what they call cumulative spend under management. That's essentially just all of the money that's being spent throughout their customer base. And that chalked in at $1.8 trillion this quarter versus $1.2 trillion a year ago.

And they're not monetizing that, they're not getting, like, a sliver of that $1.8 trillion, but it's an indicator of the health of the business and the growth of the business. And that along with its attractive subscription revenue model, I mean, I understand why the market is giving this thing the valuation it's getting, because there are some great expectations, but these guys certainly seem to be up to the task.

Hill: I guarantee you that at least one of the dozens of listeners who is a value investor heard you say, Macy's is trading at 0.1 times [laughs] sales and thought to himself/herself: Really? I might need to take a look at this.

Moser: We've talked about that before, right? That's the question with Macy's, is it a value trap or is it a value play? And I mean, my heart of hearts I want to see a world where Macy's exists and I got to say value play there. But you know, it's impossible to really predict the timing there, which makes it such a tough one to really fully buy into. But, yeah, clearly the market looks at these businesses very differently.

Hill: Tough day for Tailored Brands (TLRD). Bloomberg reported that the parent company of Men's Wearhouse and JoS. A. Bank is considering filing for bankruptcy. And shares of Tailored Brands down 15% today. We've been saying for a while, we don't want to be in this new environment in the business of selling men's suits. And Tailored Brands is 100% in that business, and not surprisingly, this is really tough for them.

Moser: It is. And it really strikes me that -- we had a listener, I believe his name is Benjamin, who chimed in a little while back with this. I'm just going to go ahead and reiterate. This may be the time, Chris, for us to bring the wardrobe mullet idea to Tailored Brands, because clearly, they need to consider some type of a pivot, some sort of corner that they need to turn to take this business in a little bit of a different direction, maybe the wardrobe mullet is it, because of all of these Zoom calls and the way that they are meeting remotely now.

You know, we're talking about those nice shirts and collars and ties on top, but really, you know, it's business up on top and party down below, whether it's shorts or jeans or flip flops or what have you. Maybe there's something there, I don't know. But in all honesty, it does feel like with Tailored Brands, I don't know that there are any really good options, it's more like only the least bad one. It just seems like they are pursuing a market that's shrinking. You know, we talk about looking for large and growing market opportunities, and there's a reason why, because I think when you look at what Tailored Brands doing, even consolidated as the Men's Wearhouse and JoS. A. Bank, I mean, they are ultimately pursuing what seems to be a shrinking market, not a growing market. And that makes it very difficult.

As far as investing goes, I mean, clearly, I would never pursue an investment based on whether or not they will pursue bankruptcy. You know we talk about investing in long-term trends or short-term catalysts. I think the long-term trend for this business regardless is bad. So, if you're looking for that short-term catalyst in whether they get some financing or a lifeline or whatever, that's fine, but the trouble with trying to invest in a short-term catalyst, you really have to time it right and that's really difficult to do. I mean, that's imperative that you time it right and that timing is just really difficult to do.

So, again, maybe there's a world where this company needs to exist, maybe it's in a much smaller form, but, yeah, I don't envy management at this point, because I don't know that there are any easy answers.

Hill: Our email address is [email protected]. Got a question from Harrisville, Utah. "Thanks for the insight on Teladoc (TDOC -2.14%). I believe the company is solving a serious problem in the healthcare system and I'm cheering them on. I recently visited my doctor and he recommended a follow-up video. However, due to the relaxed restrictions during the pandemic we set that up over Google Duo. They also indicated that the hospital was developing an in-house app. So, what long-term durable moats Teladoc have in place against competitors? Is HIPAA a meaningful obstacle to entry? Thank you for your voices of calm humor in troubling times."

Great question. And you know, we talk about Teladoc, I mean, that's one of your favorite stocks. This is a land grab. I mean, Teladoc, Google Duo, so many -- I mean, I had a telehealth visit a couple of months ago and my provider was like, no, you got to download, I think it's called Healow. So, this is a land grab.

Moser: Yeah, it is. And I'm glad that he brought up the HIPAA, the Health Insurance Portability and Accountability Act; I think that was something that was developed back in 1996 or so. But ultimately, HIPAA is something that is meant to help shore up any weaknesses in our healthcare landscape, whether it be privacy or whether it is keeping healthcare providers continually educated, continually up to speed with the regulatory environment.

And so, with HIPAA, as the pandemic has developed, HIPAA, they haven't really suspended HIPAA; I think it's more that they are just relaxing the regulations. They're not really pursuing any punishment of violations of HIPAA regulations. And that's a good thing, right? I mean, we've hit a point where really, we need to see the merits of telemedicine. And that's proving to be a very helpful solution in this time, where getting out of the house and going in to sit at a doctor's office isn't necessarily as attractive a proposition as it once was.

So, I mean with HIPAA, that is a big regulatory hurdle that healthcare providers need to clear. I mean, there is security involved, there are policies and procedures in place, you have to understand all of the HIPAA dynamics as it applies to your business, you have to document everything, you have to create an ongoing training program.

Hill: Right. I mean, that's why anytime you go into the doctor, you know, HIPAA is the law that basically protects your health information, so the whole idea of you're going to have a private setting to meet with your doctor, so that nobody else has access to what you're being treated for, what conditions you may, you know, all that sort of thing. But, yeah, as you said, I think it was the Department of Health and Human Services, sort of, relaxing those Federal regulations to make it easier for hospitals and different medical practices to engage in telehealth.

Moser: Exactly. And I think that was the right thing to do. I think it really helped shore up some extra supply for a demand problem that was coming down the pike. Going forward longer term, I don't think that that's going to be something that becomes the norm. I think that at some point or another they get back to fully enforcing HIPAA guidelines, because that's what it's there for.

And it's there for good reason. And so, I think honestly, I mean, this is something that really actually demonstrates all of the work that Teladoc Health and other telemedicine providers have done to this point in building out their networks, in building out their companies, so that they're HIPAA compliant. I mean, there's a lot of work that goes into that.

And as HIPAA does become something that's more enforced down the road, I think that just will go back to the regulatory challenges. There are some barriers to entry in this line of work in the form of regulatory barriers, and I think that's something that we'll continue to see.

And so, I think with Teladoc, as far as a durable moat -- I mean, "moat" is a very strong and I know it's something that gets thrown around a lot, thanks to Buffett and Munger. I think a moat, I don't know that necessarily Teladoc has a strong and durable moat. I think they're building it. I think that they're building it by virtue of this comprehensive offering that they have. I mean, this is not just a visit to the doctor on your phone anymore. To the point about the hospital building its own telemedicine service, that was actually the logic behind Teladoc's acquisition of InTouch Health here recently.

They bought InTouch Health, and InTouch Health is essentially a provider of those services to enterprises and InTouch Health is helping hospitals build out their own telemedicine offerings. So, that very well could be something that Teladoc is a part of in that particular situation. But again, I think it goes back to the strength in the network and the comprehensive offering and what Teladoc Health has been building out.

Another quick example. And I found this very interesting at the recent investor day, when you look at primary care, when we talk about primary care and how important that is to keeping a long and healthy lifestyle. And primary care is something that really, many adults lack a primary care doctor. [laughs] And the data actually, back in 2018 showed that in ages 18 to 29 years old, 45% of those adults lacked primary care; they didn't have a primary care team. Thirty to 49 years old, 28% didn't have one. I mean, that's for a lot of different reasons, but access is certainly one of them and one of the big ones.

And so, Teladoc is working on reimagining the primary care relationship in order to bring that to more individuals that could benefit from it. So, I just think it all kind of goes to that comprehensive offering that Teladoc Health is building out.

So, is it a moat? I don't know that I would call it a moat, but I would say it puts them in a very strong competitive position compared to their peers. And I think that as the HIPAA stuff is enforced down the road that'll become a bit more apparent.

Hill: Right. And if you're in the video conferencing business, you know, HIPAA is one of those things you have to look at and say, OK, do we want to invest time and resources into clearing the regulatory hurdles to make our business HIPAA compliant? Earlier this year we had the whole idea of Zoom bombs happening. It's like, yeah. And you and I have joked like, if someone wants to Zoom bomb us while we're just talking, that's fine. Not when I'm meeting with my doctor, no. [laughs]

Moser: No, not at all. And that's a good point. I mean, Teladoc, they built their service, their platform from the ground up. I mean, they're not relying on Google Meet or Zoom Video chat, they own that relationship. And I think that's something that's worth keeping in mind as well. I mean, they have invested a lot of money in that business through the years to build out what they have and I think they're continuing to head in the right direction.

Hill: By the way, that question came from Sean in Harrisville, Utah. I had misplaced his name earlier. So, Sean, thank you for that. Real quick before we go, one last, you can send us an email, [email protected], you can also hit us up on Twitter @MarketFoolery is the show's handle.

Question from Neil in Rockville. "Where does [Alphabet's (GOOG 9.99%) (GOOGL 10.28%)] Google's Meet come into play in the battle between Zoom and Microsoft Teams? Thanks. I'll hang up and take [laughs] my answer off-air." Love that.

You know, we pay a lot of lip service, and rightfully so. I don't mean that in a pejorative way. When we talk about Zoom, we also talk about Microsoft and Teams, and we talk about Cisco Systems with WebEx. We don't really talk about Google's Meet. I actually had a Google Meet video call last night with some friends from high school for about two hours. It was my first time using it. It was great, easy, simple, all that sort of thing, basically what you want in those systems.

If Google is pushing this in the same way that Microsoft is pushing the video offering as part of Teams, I'm unaware of that.

Moser: Yeah. [laughs] I don't think they are; I mean, I think that while Google Meet is certainly a noteworthy option. You know, it has the advantage of being part of the Google universe, and Google has a very good reputation for building services and platforms that garner a lot of users; and I think they have nine now with a billion users or more each.

You know, Google Meets has its merits. It used to be known as Google Hangouts Meet, but ultimately, it's an enterprise group video conferencing solution and it's been made free to everyone during this time, just as Zoom has been, and everyone else. So, I think with advantage, being that it's in that Google network, it's a Google service. People who are familiar with Google services, I mean, it's going to be something that's relatively consistent there.

I think security is probably the big leg-up there that Google has right now on Zoom. You know, I don't know actually that that really matters, and one of the reasons why is because I think it becomes more apparent when you start to look at all of these different Google offerings, it's confusing. I mean, you have Google Meet, Google Hangouts, Google Duo, Google whatever. And so, they do have this landscape that becomes a bit cluttered at times, and it's a bit confusing as to what is what and why I would use one over the other.

And I think, you know, the flipside that's maybe an advantage that Zoom is really honing in on is that, you know, they do one thing and they know what it is, and it works. I mean, that's what they do, it's not confusing. And I think maybe with Google and Google Meet, there still may be some confusion as to what it is, who it's for, and that could be a problem. And then when you couple that with the fact that Microsoft is doing such a good job and really getting the word out there for Teams, I mean, I wouldn't say that Google Meet is something to ignore, but I also wouldn't say that -- I'd be far more worried about Microsoft Teams as opposed to Google Meet, if I'm a Zoom shareholder.

Hill: Well, and when you consider how much cash Alphabet has on its balance sheet, it's really just a matter of waiting to see the extent to which they are willing to deploy it to get this to be the default video conferencing that people use. And it's basically going to the CFO, Ruth Porat, and making the business case.

So, I agree with you, I think -- again, just had my one first experience last night, it was great, it was easy. I have no trepidation about using it, but I would wait to see a clear signal from a Google and Alphabet that they are willing to invest in this to make it the go-to, that there is a business outcome for them where Ruth Porat signs off and says, "Okay, yeah, go. Spend the money, do what you need to do." Because I see the pot of gold at the end of the rainbow; I don't think they've done that yet.

Moser: I don't either. And I don't know that they will. I mean, if you list off all of the priorities for Google and Alphabet and really where their best opportunities are, I don't know that they view Google Meet as necessarily that opportunity. I mean, is that juice worth the squeeze, so to speak? I think Google management is probably smart enough to recognize that. It'll be something they have, it'll be something that some people use, but I don't know.

I think the signs of Google Meet success will become very apparent in the falloff in the performance of something like a Zoom.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill. Thanks for listening. We'll see you tomorrow.