Teladoc Health: Bull vs. Bear

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• Goldman Sachs cutting nearly 7% of its staff.
• Lululemon shares falling after the company lowered gross margin guidance.
• Why inventory levels will be a key retail metric to watch this earnings season.

In addition, Motley Fool analyst Kirsten Guerra and Fool.com contributor Lou Whiteman engage in a bull vs. bear debate over Teladoc Health.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 09, 2023.

Chris Hill: We've got a Bull vs. Bear on a pandemic darling. Motley Fool Money starts now. I'm Chris Hill, joining me, Motley Fool senior analyst Jason Moser. Happy Monday.

Jason Moser: Happy Monday.

Chris Hill: Happy Monday, except for a few thousand people at Goldman Sachs because The Wall Street Journal reported this morning that Goldman Sachs is planning to cut 3,200 jobs this week. This amounts to nearly 7% of the overall employee base at Goldman Sachs. Maybe not surprising given that we got wind of this in December when there were reports that Goldman Sachs was going to be cutting their bonus pool for employees and continuing what we saw last week with Salesforce and Amazon?

Jason Moser: We were saying last week, it feels like this is going to be a very common narrative for 2023, at least for the front half of the year. I don't think really anyone is immune out there. I think any company over the last stretch of two or three years, has dealt with phenomenal challenges. Unique situation and chances are we won't necessarily see these types of conditions hopefully anytime in the near future. But ultimately what happened and no company is immune is just the overhiring really took hold throughout all industries. Right? This isn't just tech. When we look at Goldman Sachs, this is 3,200 layoffs that are coming in the context of 49,000 employees totaled 6.5% of the workforce.

This is not insignificant, it's not 10%. It's not 20%. But still, I think this is just going to be an underlying theme for the coming months and quarters, if not really for all, all of 2023. As we see, a lot of businesses really work on trying to rightsize their cost structures. When you look at the growth that Goldman has seen through the years, not only in its workforce, but how that's ultimately resulted in its business. It starts to make a little bit more sense. Head count at Goldman has grown 34% since the end of 2018. If you look at revenue and operating profit over that same stretch, they're up just 32%, then it's a safe assumption that those growth rates are going to be even more challenged here in the coming quarters. Companies really working hard to try to get the most bang for their buck, so to speak.

Chris Hill: Later this month, we're going to get the start of earnings season. It is the big banks that as a group go first. This seems like one of those quarters, Jason, where even if you're someone like me who does not own shares of any of the big banks, probably want to pay more attention to what they're saying on the conference calls because I have to believe this topic is going to come up for every single one of them.

Jason Moser: I would imagine, then the other topic that really I'm going to be paying close attention to, and it's something we saw this flip very quickly over the last few months of 2022, where there was this just ongoing narrative that the consumer was in a good place. That the consumer was doing OK, and that was really helping to prop up these banks' results and very quickly that flipped. Around October, middle of October on, we started hearing more and more language about the consumer becoming more and more challenged. That is absolutely very easy to believe. We've quoted these statistics ad nauseam here on these shows just in regard to the personal savings rate being so low at 2.3%.

Clearly, more folks that are living paycheck to paycheck than there were last year. I think that's going to be another theme to really keep a focus on here coming earnings season. Because the conversation absolutely hinges on really what the Fed wants to do with this interest rate policy over the next several meetings. We're hoping that we are closer to the end than the beginning of this interest rate hiking. But you just never know. It all really kind of boils down to what inflation is doing. My suspicion though is that as we see these companies more and more work on rightsizing their workforces. That I think economic conditions just becoming a little bit more difficult. I think we'd start to see that inflation conversation turn a little bit more positive hopefully toward the back half of the year then that ultimately means that we're working our way through this difficult time.

Chris Hill: Lululemon lowered its gross margin guidance for the holiday quarter and shares of Lululemon falling anywhere 8%-10% this morning. On the plus side, they did raise revenue guidance for Q4. But what do you make of this? Because, part of the backdrop here is we got some guidance from two retailers who, let's just say they're not as strong in terms of being long-term performers rewarding shareholders as Lululemon and I'm referring to American Eagle and Abercrombie & Fitch. They were both pretty upbeat for the holidays. What did you make of Lululemon's comments?

Jason Moser: Well, very different businesses, I would say. I think you've looked at Lulu being a more premium offering. They're going to focus a little bit more on pricing and not necessarily cutting prices as much as maybe some other value offerings might be able to do. I think you're right there when you look at it from a stock perspective, it's been a fascinating story to follow here over the last really probably decade. This was a business that many years ago was extremely challenged. Founder-owner that really was taking the business in a little bit of a questionable direction. They got their house in order though, and it's an investment that's worked out really quite well over the last five and 10 years. Stock is up 279% and 318%, respectively, over those periods and outperforming the market.

Investors have won. But it is been a bit more challenging as of late though, if you look at the margin picture. But I mean, I don't think Lululemon is going to necessarily be the only one in this boat. I think that we're going to see companies dealing with challenging margin pictures here all throughout the year. But hopefully it does start to get a little bit better. But you look at what Lululemon has done over the course, over the last five years, gross margin up from 53.1% in 2018 to 56.3% trailing 12 months. That ultimately has come down to the bottom line in a big way. Net margin up from 9.8% in 2018 to 15.7% trailing 12 month. Again, I look at this adjustment to guidance, I think this is just some noise in the context of what is ultimately a very good business. But I do think that for investors here, something to watch, is going to be inventory in the coming quarters. You look at just the last earnings call.

They ended the quarter with their dollar inventory up 85% from a year ago. When you consider that, it clearly is going to be something that they're going to have to contend with anytime you see these apparel companies and you see those inventory numbers really start to go up. To that degree, you have to start asking some questions. Management said on the call that was by design and that was part of the strategy. They felt like their inventory's too lean from a year ago. They've really worked on boosting those inventory channels up this year. I would be a little bit concerned that they're maybe a little bit inflated and maybe that is where this margin guidance ultimately is coming from. If that is the case, that has a ton of inventory to work through the system. Particularly when you're just coming out of the holiday season and you're in a bit more of a challenging environment for the consumer as well. It could be some tougher days ahead for Lululemon, but I don't know that necessarily damns the business for the long term, so to speak.

Chris Hill: I was going to say taking everything you just said, obviously, it's going to be more interesting to get their quarterly results when they come out, listen to what they say on the call, they didn't really change their earnings-per-share guidance. So I get the hit on the margins, but if you're focused on earnings per share, it's basically unmoved from where it was.

Jason Moser: All they really did was tightened that window up just a little bit. They adjusted that window down to a range of $4.22-$4.27. That was from previously $4.20-$4.30 dollars. They're actually giving you a little bit more certainty there, a little bit more certainty in exactly where they see those margins coming in at the end of the year. Again, that just comes from managing costs effectively. I mean a lot of businesses, they've got a lot of practice in being able to do that very well. Gross margin challenges don't necessarily mean that the business is going to be in trouble, so to speak. But again, I would keep an eye on those inventory levels because I have a feeling that could be something that we are going to talk about this I think again a quarter or two down the road.

Chris Hill: Jason Moser, always great talking to you. Thanks for being here.

Jason Moser: Yes, sir, thank you. 

Chris Hill: Got to be honest, I don't own shares of Lululemon, but when I see the stock selling off 10% based on short-term guidance, it does get me more interested in buying shares at a discount. If you also have that mindset when you see stocks pulling back from their highs, you might be interested in the list of five stocks that our team of analysts has identified. Companies whose stocks have fallen recently, but they've got strong fundamentals and catalysts to set them up for future success.

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Ricky Mulvey: Welcome to Bull vs. Bear. We find a company, find a couple of Fools to discuss it, and then flip a coin to see which side they'll take today. That company is Teladoc, the virtual healthcare and telemedicine company serving 40 million members worldwide 2021. If you've listened to our podcast, you might have heard of their subsidiary, BetterHelp. On the bull side of this case, we have Lou Whiteman. Lou, good to see you.

Lou Whiteman: Good to see you.

Ricky Mulvey: On the bear case, it's Kirsten Guerra. Thank you so much for joining us.

Kirsten Guerra: Thanks for having me back.

Ricky Mulvey: Both of you will have 3-5 minutes to make your case. Starting out with the bull side. Lou, that time is yours.

Lou Whiteman: Thanks, Ricky. I'm here to make the bull case for Teladoc, and I understand that. Happy to do it. But I feel like we do have to address the elephant in the room before I do. I am here to make a case for a stock that is down 92% from its high, 92%. And yes, ouch. In hindsight, it is pretty clear, we're here to talk about a business and a stock that got way out ahead of reality. Teladoc, for those unfamiliar, is a virtual health company. It provides a secure, regulatory-compliant pipeline for patients to talk to their doctors, therapists, medical experts anywhere, anytime by phone, by video. This is a business that was just tailor-made for the pandemic. Indeed, it grew a lot faster than even management in their wildest dreams would have predicted pre-pandemic. Yes, that growth was not sustainable.

The enthusiasm around the stock is now gone. But if you go back to 2019, pre-pandemic, when we had a young emerging business with a promising idea and the potential to tap a huge market, that business is still here today. The bull case from here is, this is still a leader in the field and it's well positioned to fulfill a major need in the healthcare marketplace. Let's talk about that opportunity. Americans spend $3.8 trillion annually on healthcare. That's more than 17% of our gross domestic product. We are desperately, as a nation, trying to bring costs under control. Telemedicine needs to be a big part of the answer to that problem. Now, sure, there are a lot more companies out there than Teladoc that are competitors. But this is a market that is far too big to be a winner-take-all environment.

There are going to be a lot of winners. Teladoc, with its head-start and a regulatory-compliant infrastructure, can't emphasize enough how important it is to be on the good side of regulators when you're talking about health information. They have a huge head start on new entrants. One of the reasons investors have soured on Teladoc is it did overpay for a huge acquisition. In October 2020, Teladoc bought Livongo for $18 billion. The deal added a portfolio of smart devices and remote care for patients with managing chronic conditions. Looked good on paper. But history shows they really overpaid. Teladoc has since taken billions in impairment charges, writing down the deal value. But right now, at least a big part of that purchase price was stock and they did it at a time when all telemedicine companies, buyers and sellers, were way overpriced, which doesn't make it OK to overpay but the stock component does mean the deal didn't blow up Teladoc's balance sheet.

Livongo does provide Teladoc with a great set of assets they can now use to offer a more complete package to customers. It's also worth noting that there was no further impairment charge in the most recent quarter. Hopefully, the write-downs are over and Teladoc still has this great set of assets. Where from here? If you were to buy Teladoc today, you are buying a company that expects to grow revenue and total visits at a double-digit rate, a company that continues to grow its profitability per customer quarter after quarter, and a company that is just beginning to expand internationally. You are getting a company that is much more battle-tested than it was just a few years ago. The pandemic forced us to embrace telemedicine. What was once a potential market is now a very real market. Teladoc today has relationships with nearly half of the Fortune 500 companies.

It's a great foundation to build from. The best part: Today, you can buy this business for 1.6 times sales, which is a pretty reasonable valuation for a growth company. Look, I get it. It's hard to look past the last year or so. The last year or so has been ugly for the stock. But it's important that we don't anchor on the past. Right now, today, we have a real business with real customers with great growth potential, now at a back-to-Earth valuation with a massive total addressable market out ahead of it. It's still a tough market for growth stocks. I don't know what the next few months will bring. But Teladoc, given its market opportunity, given its proven ability to grow into that opportunity, and given the assets it has assembled, I believe, this stock has the potential to be a huge, massive, long-term winner for those who are patient.

Ricky Mulvey: Lou Whiteman, thank you for the bull case. Hope the folks behind you end up being OK. Kirsten Guerra, you have the bear case for Teladoc, 3-5 minutes, that time is yours.

Kirsten Guerra: Thanks, Ricky. I won't argue that the market ahead of Teladoc is huge, but it wouldn't be the first company to squander a great opportunity. My main issue with Teladoc is that I don't like much of anything about its growth. First of all, where is it? Teladoc estimated 6%-8% annual growth on its paid membership base for 2022 and that's growth, but it's far lower than what I'd expect for a company at this stage and certainly what previous valuations have implied. But OK, 6%-8% growth in member base. That still leaves the opportunity to grow through increased spending on the platform from existing members. But sessions on the platform have steadily dropped since Q1 of last year and utilization rates took their first dip in the most recent Q3 reports.

This left revenue per member flat. Now again, considering the opportunity before it, this seems like either a weak sales execution or maybe the demand for these types of telehealth services simply isn't what we think. For several quarters now, Teladoc has pointed to its online counseling and therapy offering BetterHelp, which you mentioned, Ricky, as a major contributor to revenue growth. But reliance on growth in BetterHelp specifically scares me. Because BetterHelp is their only product I've heard people talk about out in the wild and not in a good light. I've seen a lot of TikToks from mental health professionals warning people away from this platform specifically. Essentially, their concerns revolve around poor data privacy with mental health information, maybe one of the last things that we would want to be shared about us.

Without getting into that too much, I think the BetterHelp brand is at risk with its target audience. That makes me extra wary that it accounts for so much of Teladoc's touted growth so far. BetterHelp, by the way, was acquired by Teladoc in 2015. That brings me to maybe one of my biggest reasons that I'm not a fan of Teladoc's growth story. They're so reliant on acquisitions. Often, not always, but often the best companies derive most of their growth organically. Meaning, they sell more and more of the products or services that they develop internally. Inorganic growth comes from acquiring another company and simply absorbing the revenues, customers, and assets that come with it. To be clear, there are many cases when acquisitions make a lot of sense.

In Teladoc's case, I think they're trying to retain top dog status by gobbling up competitors as they grow to threaten them. That could be a smart play and I'd give them more credit if they had the finances to back it up. But they don't. This company is operating with net debt to the tune of $700 million, meaning their debts significantly outweigh their cash. They do pull in positive cash from operations, but only because of how much it's relying on stock-based compensation. Already, they're not in the strongest position to continue relying so much on acquisitions, but it gets worse when you consider their track record on acquisition valuation. Lou mentioned this. In 2020, they acquired Livongo for $18.5 billion. Two years later, they took a goodwill write-down on that acquisition for 6.6 billion.

Yes, it's true that a lot of that was in stock. Now that the stock has fallen 92% or so, that means they don't have that lever going forward. That was basically a formal recognition by management that, hey, we overpaid for this and that a full third of their payment for Livongo was worthless, which is not a great look. Overall, growth rates aren't what I'd expect. Recent usability trends have turned down. There's a lot of growth reliance on one product that I think is at the greatest risk of brand deterioration and it will be harder to execute its acquisition-heavy strategy going forward. Now, maybe you'd expect me to mention far earlier in the bear case the fact that telehealth competitor Amazon Clinic launched only two months ago. But honestly, I think how Teladoc has been performing all on its own before the Amazon threat speaks for itself. For me, it's time to call it on Teladoc.

Ricky Mulvey: Kirsten Guerra, thank you so much for the bear case. Lou Whiteman, thank you again for the bull case. Hey, you can decide who made the better argument @MotleyFoolMoney on Twitter. We will have a poll there, because today's lucky winner will receive:

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Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.