Growth stocks rocketed higher for much of the pandemic. But since November, investors have been ditching companies whose profits are far in the future. And Teladoc Health (TDOC -0.07%) has been one of the poster children for the shift in sentiment. The stock is down 76% from the all-time high in early 2021.
Analysts might need to start rethinking just how distant those profits are after the company's recent earnings report. Management offered insight into its mental health offering that should give investors hope that the company is much closer than they realized.
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Growth is finally producing cash flow
Teladoc has never turned a profit -- at least not using generally accepted accounting principles (GAAP). Yet hypergrowth fueled by the pandemic and a few acquisitions have pushed revenue up nearly three-fold since the end of 2019. The combination breathed life into a company whose rate of growth had fallen precipitously heading into 2020.
TDOC Operating Revenue (Annual YoY Growth) data by YCharts
Despite added sales due to COVID-19 in 2020, the acquisition of Livongo led to expenses that made it seem like the company might never be profitable. The first year that Teladoc actually generated cash rather than burning it was 2019. In that year, cash flow from operations (CFFO) was 5% of sales. That ratio flipped in 2020 to negative 5%.
The numbers were even worse through the first nine months of 2021 -- negative 15%. However, the latest report shows cash heading back in the right direction. CFFO as a percent of revenue came in at positive 9.5% for the full year -- a remarkable turnaround. It's no secret how it happened.
Adding more value per member
A key driver of that turnaround is how many services the company is able to offer members. And its mental health offering seems to be standing head and shoulders above the rest. BetterHelp, its direct-to-consumer (DTC) mental health offering, logged $700 million in revenue last year. That's impressive for a product that was acquired for a mere $4.5 million in 2015.
MyStrength Complete -- the company's mental health offering in the business-to-business (B2B) channel -- is also pulling its weight. It's serving as an on-ramp for members to other services like dermatology or general medical.
Management cited the BetterHelp brand and the increasing number of members using mental health services as factors that have decreased customer acquisition costs and increased retention. Together, it adds up to both a higher lifetime value per customer and increasing revenue per member each quarter.
Data source: Teladoc Health. Chart by Author.
The success is creating a flywheel where more patients are using Teladoc's platform, which attracts more therapists to serve them. In fact, Teladoc reported adding more than 10,000 new therapists last year, with another 1,200 joining in January 2022. That is incredibly valuable in a world where therapists have become hard to find and the need for treatment has spiked.
Leaving competition behind
Teladoc's competitors are not standing still. Amwell (AMWL -1.62%) acquired digital mental health provider SilverCloud Health last July and highlighted it extensively on its own earnings conference call. However, in contrast to Teladoc, Amwell's service is (at least temporarily) hindering profitability, and management has not yet decided what operational metrics it will share with investors. It adds up to a much more nascent part of the business.
The focus from both companies is welcome. Mental health is an ongoing crisis in the U.S. Many are calling it the next pandemic as people struggle with isolation and adapting to a new normal. A study in the medical journal The Lancet estimated there were 130 million more cases of anxiety and depression globally in 2020 than before. The surge has strained the capacity of many healthcare providers and left prospective patients unable to find the help they seek.
Supposed competition becomes collaboration
Thanks to a surprising strategic partnership, getting help could soon get easier. On Monday, Teladoc announced that its general medical virtual care would be available on Amazon's (AMZN -1.64%) Echo devices. All users need to say is "Alexa, I want to talk to a doctor." With one-third of users on the Teladoc platform now accessing mental health resources, it isn't hard to imagine the partnership expanding beyond support for mere cold, flu, and allergy symptoms. It's another potential positive development shareholders should look out for.
Adding mental health support to the Echo-supported services would only open the funnel wider to capture a segment of customers that appear to be driving Teladoc toward profitability. On the conference call, one analyst summed up investor sentiment when asking about management's guidance. He implied an EBITDA margin -- that's earnings before interest, taxes, depreciation, and amortization -- of approximately 17% by the fourth quarter of this year. His excitement was hard to disguise when he offered that most on Wall Street didn't expect Teladoc to achieve those margins for another three or four years.
Shareholders should be excited too. Despite a beaten-down stock price, investors with a multi-year time horizon should look through the negativity and recognize the green shoots of profitable growth. They are rising from the seeds management has been planting for the last few years. It isn't too late to benefit as Wall Street is only starting to catch on.
