When Teladoc Health (TDOC 0.90%) reported earnings late last month, investors were eager to learn whether trends established earlier in the pandemic could be sustained, and what the integration of Livongo would mean for growth in 2021 and beyond. The news was mostly positive, with several metrics pointing to a new normal for the telehealth provider, but one number did give analysts pause. Let's dig a little deeper and explore what shareholders should be excited about, and what might make them nervous.
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Green flag No. 1: Utilization
Year-over-year U.S. visits were up 158% in the fourth quarter (ended Dec. 31, 2020) to 2.5 million. That drove the percentage of members utilizing Teladoc's platform to 17.7%. Despite COVID restrictions being lifted in many areas, the company's virtual health services appear to have reached a new steady state. While COVID cases fluctuated throughout the year, the percentage of members who are using Teladoc's services steadily increased. That's good for clients -- and great for the company.
| Period | 2020 | 2019 | Change |
|---|---|---|---|
| Q1 | 13.4% | 11.1% | 21% |
| Q2 | 16% | 9.1% | 76% |
| Q3 | 16.5% | 8% | 106% |
| Q4 | 17.7% | 9.5% | 86% |
Data Source: Teladoc Health
When more members take advantage of the service, costs to clients come down. This not only increases the likelihood that clients will renew their contracts with Teladoc, but it also increases the chances that they will spend more on additional offerings. The company considers this one of the primary growth levers and touts predictive analytics and personalized consumer experiences as key ways it improves member utilization.
Green flag No. 2: Revenue growth
Teladoc also had good news to share about revenue growth. Organic year-over-year growth, without factoring in acquisitions, was up 79% in the fourth quarter to $383 million. During the year, Teladoc purchased InTouch Health in January and Livongo Health in August, two other fast-growing virtual care companies. All three benefited from the rapid adoption of virtual care in 2020, and the combined entity posted full-year revenue of $1.1 billion, nearly double Teladoc's 2019 sales.
Management expects a return to normalcy in 2021, but believes the pandemic has established a higher level of acceptance for virtual visits. The company now has more ways to take advantage of this change. In addition to signing up new clients, it can cross-sell Livongo's services to its legacy customers. That second method appears to be accelerating with more than a dozen deals closed since the acquisition and new opportunities doubling in just the past three months. Thanks to this, the company guided for revenue growth of about 80% this year, expecting to generate sales of nearly $2 billion.
Red flag: Membership growth
One area of concern was management's guidance for membership growth. The estimate of 52 million to 54 million members by the end of 2021 is only slightly higher than the 51.8 million at the end of 2020. To be fair, that is net of a 1.5 million reduction in COVID-related temporary members that will fall off during the first quarter. Further, the company expects visit-fee only customers to be 22 million to 23 million compared to 21.3 million recorded at the end of the fourth quarter. All of these numbers suggest the market could be getting saturated. Analysts didn't let the implication go unnoticed.
After several questions on the earnings call about membership, CEO Jason Gorevic pointed to the explosive growth over the past few years and the need to refill the sales pipeline after many deals were pulled forward due to the pandemic. Gorevic and the analysts are both right. Teladoc has doubled membership in the past two years, an impressive feat. However, the predicted slowdown is a legitimate concern as it pins the company's hope for growth on cross-selling and pricing, both of which have their limits.
A pre-pandemic valuation
Despite the slowdown in members, Teladoc is forecasting impressive growth and has just added a valuable service to sell to existing clients. When the Livongo deal was made, the leaders pointed to the cross-sell opportunity as a key motivation. They highlighted that only 25% of the two companies' customers overlapped. Closing that gap should be able to fuel growth for now.
After the recent decline in stocks that benefited from lockdowns, shares trade for about 16 times sales. That's the lowest since the depths of the March 2020 sell-off. The stock is by no means cheap, but it hasn't been this inexpensive in a year. Investors who have been waiting for a chance to buy the stock may want to take advantage of the opportunity while it lasts.
