Teladoc Health (TDOC +4.24%) is releasing its first-quarter results on April 28 for the period ending March 31. It is going to be a pivotal earnings report; a strong performance could turn the stock's fortunes around. Year to date, it has declined 5% while the S&P 500 is up over 11%.
The company benefited from a surge in demand for telehealth last year, but now, coronavirus-related restrictions are relaxing and more companies have begun offering similar services. This upcoming quarter will tell investors a lot about just how robust and well-equipped its business is to deal with new challenges. Whether the quarter is a good one for Teladoc will depend on three main factors.
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1. The number of virtual visits
A lot has changed over the past 12 months. More companies are offering telehealth services, and concerns about the pandemic are beginning to subside now that vaccines are being administered. Teladoc already saw this in the crosshairs when it released its fourth-quarter earnings on Feb. 24. Then, the company reported virtual visits of 2.96 million for the last three months of 2020 and 10.59 million visits for the full year. The number of visits is key to the company's revenue, which doubled to $1.1 billion in 2020. However, looking ahead to Q1, Teladoc projected that visits won't be a whole lot higher, ranging between 2.9 million and 3.1 million. Arriving at the top end of that forecast would represent growth of approximately 5%.
Investors may be down on the stock because its projected growth rate for Q1 looks modest given the potential tailwind from the new customers Teladoc earned from its acquisition of Livongo, a chronic care company. But the bigger concern is whether it could be even lower, than that since patients have many more options to choose from as companies focus more on telehealth.
Health insurance company Cigna recently acquired MDLive, which offers telehealth services. Earlier this year, Quest Diagnostics partnered with 98point6 to create a telehealth solution that would allow patients to easily consult with a doctor after a test result. Even retail pharmacy CVS Health now offers telehealth bookings online through its MinuteClinic.
A year ago, companies weren't as focused on telehealth, but now with ResearchAndMarkets projecting that the industry could be worth nearly $192 billion by 2025 and growing at a compound annual rate of 37.7%, it is attracting lots of attention. And whether Teladoc can continue to dominate, especially after an already strong 2020, will be a huge test for the company.
2. Cost savings from the Livongo deal and overall profitability
In Q4, Teladoc's adjusted EBITDA was $50.4 million, which was more than triple the $15.2 million it reported in the prior-year period. The company benefited from $5.4 million in cost savings as it spent less on Livongo devices. In Q1, it expects those savings to rise to $7 million, although it projects adjusted EBITDA will only be within a range of $45 million to $48 million. Teladoc previously forecasted that it would achieve $60 million in cost synergies by the second year after the Livongo transaction closed. The companies completed the merger on Oct. 30, 2020, so it is still in its early stages.
However, as the company's growth rate slows down, investors will likely want to see more improvements on the bottom line. When a business is growing quickly, it is easier for investors to dismiss a weak bottom line. And while Teladoc is profitable from an adjusted EBITDA standpoint, its operating income last year was a negative $506.4 million. If that doesn't improve, it could spell trouble for its cash position.
3. Cash flow
Investors should never ignore cash flow, because that can dictate whether a company needs to raise debt or issue shares in order to continue growing. Negative cash from operating activities can be a huge red flag, especially if a company's stock is also falling. At a lower price point, a company will need to issue more shares to issue the same amount of cash than it would if the stock was higher. Taking on debt isn't ideal, either, as that can saddle the business with interest costs and restrictions.
In 2020, Teladoc burned through $53.5 million in cash from its day-to-day operating activities. In two of the past four quarters, it has generated positive operating cash flow, but Q4 was deep into the red at negative $115 million, as merger-related expenditures had an adverse impact.
Now that the dust has settled from the Livongo deal, investors should look for an improvement and a return to positive cash flow.
Should you buy Teladoc stock if it does well in Q1?
Despite the challenges Teladoc is facing, the stock still looks like an attractive buy after its merger with Livongo and the growth opportunities that will arise from that merger. And if it performs well on the items noted above this coming quarter, it could be proof that the business has won over patients even though they have many other telehealth options to choose from in the marketplace. That could re-energize the healthcare stock, potentially setting it up for a strong rally. With Teladoc down more than 35% from its 52-week high of $308, it may be a solid stock to pick up if its Q1 looks strong.
