When investors think about an investment turning them into a millionaire, they are often dreaming of stocks that grow 10, 50, or even 100-times in value. Stocks like Amazon, Netflix, and Chipotle are great examples of how a modest sum can be transformed into riches over time. These companies all maintained incredible growth by offering customers what they wanted in a new, easier way. Teladoc (TDOC 1.98%) has that potential as it tries to increase access to and quality of care, as well as lower costs in the healthcare industry.
Assembling a comprehensive care network
The global leader in telehealth has built its end-to-end care network by spending $20 billion acquiring a dozen complementary businesses since 2015. The services include 24/7 support, appointments with primary care physicians and specialists, as well as access to services for mental health and wellness.
Image source: Getty Images.
Teladoc has grown by signing up employers, insurance providers, and healthcare systems, and charging a subscription fee for each member as well as a visit fee when they utilize the service. The company also has a direct-to-consumer arm for patients without an affiliation with one of its customer organizations.
Scaling up during the pandemic
The company has grown rapidly, filling the void created by COVID-19 scaring patients away from doctor's offices, or the offices being closed altogether. During the second quarter of 2020, ending June 30, visits more than tripled compared to the same quarter of 2019 while member growth rose 92%. Business remained at these elevated levels during the third quarter. With U.S. cases remaining high through the holidays and vaccine rollout still proceeding at a slow clip, the numbers aren't likely to slow down anytime soon.
Through the first nine months of 2020, the additional volume is proving the business can become profitable as it grows. Adjusted earnings before interest, taxes, debt, and amortization (EBITDA), a proxy for cash flow that adds non-operating costs and other noncash items back to earnings, rose 361%. Compare that to the 79% increase in revenue over the same period, and it's clear the company is spending less and less for each extra dollar of revenue. Ultimately, the earnings and share price will depend on how big the network of customers and users becomes.
What it will take
There is no dispute over the incredible growth Teladoc experienced in 2020. There are questions, however, about how much the growth will recede once COVID-19 is under control. Before the pandemic, the growth rate, while still impressive, had been declining over the past three years. For the fourth quarter of 2019, the last before the pandemic, Teladoc reported year-over-year revenue growth of 27%. That was a far cry from the 80% and 70% growth the company put up in 2017 and 2018, respectively. The acquisition of Livongo, the provider of chronic disease management services that grew revenue 150% in 2019 and more than 120% through the first two quarters of 2020, will provide a boost. However, Livongo's impact will be muted as its sales make up a little more than a quarter of the combined entity.
TDOC Revenue (Quarterly YoY Growth) data by YCharts
Although some believe the growth rate will revert once vaccines are distributed, optimistic observers say the pandemic has ushered in a new era in healthcare -- one in which virtual medicine and remote monitoring become the norm. If that's the case, Teladoc could see its business continue expanding at a rapid pace for years.
With such a wide range of outcomes, it's best to embrace the uncertainty. By modeling different scenarios, we can establish a range of likely outcomes for the stock. Before COVID-19, the market valued the company at 11 times sales. That price-to-sales ratio (P/S) has climbed as growth accelerated. The stock now trades at 24 times sales, and management has indicated growth will be consistently between 30% and 40% for the foreseeable future. We can apply the P/S ratios and growth ranges to come up with what the stock might trade for five years from today.
| Stock Price in Five Years | 30% Growth | 40% Growth |
|---|---|---|
| P/S = 11 | $308 | $446 |
| P/S = 24 | $672 | $973 |
Data source: YCharts. Table by Author.
| Annual Return | 30% Growth | 40% Growth |
|---|---|---|
| P/S = 11 | 3% | 11% |
| P/S = 24 | 21% | 30% |
Data source: YCharts. Table by Author.
Investing is about possibilities and probabilities
Using these inputs gives us a range of outcomes from a 3% annual return up to a 30% annual return. Of course, the company could fail to meet the growth numbers it set out, or it could exceed them. To further complicate things, the market may be willing to pay less for every dollar of sales the company generates in the future, or it might even pay more. Looking at the possibilities, Teladoc stock seems to offer the potential for significant gains. An investor would need to buy $270,000 of stock to have $1 million in the optimistic five-year scenario. Market sentiment can change in a flash, but the stock appears to have a lot more potential reward than risk if management can hit its goals.
