Wow! There isn't much to say when a stock you own gets nearly cut in half after reporting earnings. That's what just happened for Teladoc Health (TDOC -0.44%) as it cut guidance and took an accounting charge of more than $40 per share. For context, the stock is only trading at $30 right now.
That's not good. But the $40 loss is just on paper. It relates to an acquisition the company made in 2020 that isn't worth what management thought it was. And that begs the question: Are shares now in the bargain bin? These charts might answer the question.
Image source: Getty Images.
The right place at the right time
In hindsight, the pandemic was both a blessing and a curse for Teladoc. COVID-19 was only mentioned once on its February 2020 earnings call. Little did management know the role it would play in the transformation -- and potential downfall -- of the company that had carefully grown for almost two decades.
The closure of physicians' offices and general fear of being in a healthcare setting led many to try telemedicine for the first time. Visits using the company's technology spiked.
Growth is still robust. The midpoint of management's estimate for total visits this year is for more than 23% year-over-year growth.
Data source: Teladoc Health. Chart by author.
A limited market with large players
The pandemic had another effect. It forced many health systems, health insurers, and employers -- Teladoc's potential customers -- to sign up for a virtual-care service. As they became customers, their members were reported by the company.
The jump in 2020 has been followed by slow-but-steady growth. The estimate for 2022 is the midpoint of management's guidance. The slow growth has Wall Street focused on the potential ceiling of members available to the company.
Data source: Teladoc Health. Chart by author.
With limited upside in members, growth had to come from somewhere else. Teledoc needed to increase how frequently members were using the service.
More reasons to get customers to log on
It's no surprise that as people stayed home, they relied more on virtual care for both routine and episodic visits to the doctor. This behavior -- called utilization -- also jumped in 2020. But that behavior wouldn't last once the pandemic ended.
Recognizing the potential drop-off, management needed to find a way to keep members engaged. And the obvious source was people who had to make routine visits all the time -- like those with diabetes. Chronic-care management had been a hot area, and digital-health app Livongo was flying high after a recent initial public offering (IPO).
Teladoc management saw the answer to the question Wall Street hadn't asked yet. So it made an offer Livongo couldn't refuse. It acquired the company for $18.5 billion.
Livongo had less than 600 employees the year before the deal was finalized. It's not quite the $16 billion that Facebook (now Meta Platforms) paid for 55 WhatsApp employees in 2014, but it's still outrageous.
It did accomplish the goal. Utilization has steadily climbed, even after 2020, as more members take advantage of the added chronic-care service. CEO Jason Gorevic reported that almost 4 out of 5 sales in the first quarter were multiproduct deals.
That gives Teladoc more revenue per member. It was $2.52 in the first quarter, versus $2.09 in the same period last year. That lever of growth is still working.
Data source: Teladoc Health. Chart by author. *2022 utilization only through Q1.
Show me the money
Despite slowing membership growth, increasing visits and revenue per member should keep investors from revolting. The fly in the ointment is profit. Even management's version is heading in the wrong direction.
Adjusted earnings before interest taxes, depreciation, and amortization (EBITDA) as a percentage of revenue is projected to turn negative this year. After Teledoc slowly marched higher toward profitability, shareholders are now left with losses, even after management removed all of the expenses it doesn't think are recurring. It brings the viability of the business into question.
Data source: Teladoc Health. Chart by author.
The market reaction was swift
Investors didn't waste time trying to figure out just how long the losses would last or if there was a light at the end of the tunnel. The stock quickly collapsed and is now down 90% from its high.
Teladoc started out with a noble mission of increasing access to care through remote services. That helps both doctors and patients. The pandemic fueled growth by making every potential customer choose a telehealth provider or develop their own. That was great for one year.
To offset the potential slowing growth, management bought a good business for an astronomical price. Now, it's unable to keep costs in line as the landscape changes and is projecting losses, even after accounting for one-time costs.
It's hard to guess how low Teladoc stock will trade with no profits and a difficult path to achieve them. Shareholders who hang on may need patience. Teladoc has more than $800 million on its balance sheet and burned about $30 million in cash this quarter. At that rate, it has several years to figure things out.
One thing is certain: The growth phase is behind it. Whether it can cut enough costs to once again attract Wall Street's gaze is still to be determined.
