For a business that essentially connects people to a doctor via a phone call, Teladoc Health (TDOC 3.05%) is a pretty controversial stock, at least among some of the world's most well-known portfolio managers. For instance, Cathie Wood's ARK Investment Management owns nearly 12.6% of Teladoc, and it's a significant component of her popular ARK Innovation ETF (ARKK +0.54%). In fact, her fund added to its position twice in the last week, buying more shares on both Sept. 6 and Sept. 7 even as the company's shares have declined by 77.3% in the last 12 months.
But Warren Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B) probably won't be starting a position in Teladoc anytime soon, and there are a trio of (fairly enlightening) reasons why the Oracle of Omaha is unlikely to be as enthralled with it as Cathie Wood is. Let's start with the most important difference in his perspective and go from there so that you can decide whether to buy (or sell) the stock yourself.
NYSE: TDOC
Key Data Points
1. It doesn't have an established economic moat
The first and biggest reason that Warren Buffett likely isn't crazy about Teladoc is that it lacks an established economic moat to defend its market share from erosion by competitors, which means that it also lacks a significant competitive advantage.
If you're not familiar with the term, economic moats are factors like brand strength, customer lock-ins, low-cost means of production, intellectual property (IP), and economies of scale that make it harder for other players to grow and easier for the owner of the moat to maintain their margins and often their rate of growth as well. Buffett is a huge proponent of businesses with wide moats. For example, his biggest holding, Apple, has multiple wide moats in the form of an incredibly valuable and well-known brand, tremendous economies of scale with inexpensive manufacturing based in China, and a galaxy of intellectual property claims protecting its technologies from being copied by others.
Teladoc has none of the above to any significant degree. Its brand, despite being a household name since the pandemic began, doesn't exactly excite the public. After all, when's the last time you heard of the company's newest service offerings getting talked about in the media? Likewise, it has no economies of scale to speak of. It can't lower its costs of hiring clinicians as demand rises; it can only hire more of them at roughly the same cost to meet demand. Nor is its IP sufficient to block competitors from starting telehealth businesses with roughly the same implementation. So that's a few big deterrents to Buffett.
2. It spends a high percentage of its revenue, while Buffett prefers higher-margin businesses
Another area where Buffett would probably disagree with Wood is regarding Teladoc's spending, particularly its spending on research & development (R&D) as well as on selling, general, and administrative (SG&A) expenses.
Generally, he dislikes businesses that need to keep spending a lot on things like R&D to stay ahead of the competition, as product-development arms races lead to thinner margins. Similarly, high expenditures on SG&A mean that a company may need to be in a marketing or sales arms race, which has the same effect. Worse, SG&A also covers costs like legal fees, rent, and travel expenses, all of which can either be heavily overpaid for or signify other suboptimal situations, like a high risk of facing lawsuits.
In the second quarter, Teladoc spent more than 13.6% of its quarterly revenue on R&D and more than 56.2% on SG&A. Even if it needed to spend money to keep operating, Buffett could probably find a lower-cost business elsewhere.
3. It has been consistently unprofitable with highly volatile cash flow
The final reason why Warren Buffett probably isn't keen on Teladoc stock is that it isn't profitable, and its cash flow has been more variable than he might prefer. Businesses need enough money to reinvest in themselves for more growth, not to mention returning capital to shareholders. Take a look at this chart of Teladoc's quarterly free cash flow (FCF):
TDOC Free Cash Flow (Quarterly) data by YCharts
As you can see, its FCF often careens from positive to deeply negative from quarter to quarter. And economic factors seem to be part of the reason why the company's earnings guidance in 2022 had to be massively slashed. That's hardly the kind of ploddingly uniform growth year after year that the Oracle of Omaha looks for in an investment. So, it's safe to say that Berkshire Hathaway won't be buying shares of Teladoc anytime soon -- even if Cathie Wood thinks its growth potential makes it too good to pass up.
