The telemedicine leader did not report a great quarterly pace, but Health Teladoc (New York Stock Exchange:TDOC) provided further evidence that the business is stabilizing at strong growth rates. Nobody doubts the future of online medical consultations, but a lot There are many questions about the final size of the market and the profitability of the participants in the business model. Me investment thesis he is much more bullish now that stocks are trading well below pre-Covid levels while the business plan is fully executed.
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Even though Covid demonstrated the benefits of telemedicine and Teladoc Health continues to thrive following the normalization of online medical visits, stock remains in landfills. The company reported that third-quarter 2022 revenue grew an impressive 17% to hit a record $611 million, but the stock only traded at $27 before the earnings report.
Teladoc was regularly trading above $50 before Covid and the company produced a ton of growth over the last 3 years. The best news about Q3 results was that the company continued to grow US paid members, but more importantly, revenue grew without the company increasing visiting fees or most metrics. operations that increased during Covid.
The company continues to grow the average US revenue per member. Teladoc Health now earns $2.61 per member, up 9% from $2.40 last quarter. The Holy Grail of telehealth is to generate more revenue per member by offering expanded products and services to those members.
The combination of higher members and revenue per member drove strong revenue growth. Perhaps more importantly, Teladoc saw a strong build in the deal portfolio along with some signs that customers are looking for a full suite of solutions to bring leading telemedicine healthcare organizations back to the market leader.
On the Q3 2022 earnings calls, CEO Jason Gorevic discussed the improving deal environment and suggested healthcare organizations are going back to best-of-breed solutions:
Year-to-date bookings, which represent the estimated incremental annual revenue contribution from deals signed during the year, is roughly equivalent to the same period last year. However, we are encouraged by a number of important new deals that we hope will contribute to our growth in the coming years.
Lastly, while we typically close many deals with new employers in a given quarter, I wanted to highlight one in particular, as I think it underscores the value proposition of our extensive offering of integrated services. We are replacing 3 different competitors at once in chronic care, telemedicine and our myStrength mental health solutions in one of the largest providers of care for prisons and other government run institutions. We believe the market is moving away from disparate point solutions towards integrated offerings, a trend that we believe strongly favors Teladoc Health.
The picture of the margin seems to have improved in the quarter. Teladoc Health generated adjusted EBITDA margins of 8.4%, compared to 7.9% in the prior quarter. Additionally, adjusted gross margins have risen to 69.6% for a recent high.
The company will return to strong EBITDA margins in the fourth quarter with an EBITDA forecast of $93 million on revenue of $633 million. The 14.7% margin will soar beyond the 13.9% produced last quarter, another good sign that some of the price pressures in the sector are fading.
The lack of capital and reduced interest in investing in sectors where shares have tanked should help reduce some of the competitive pressures in the sector. The big downside to increased demand during Covid is that fast growth attracts more capital, while weak growth drives away fast money.
Teladoc is forecast to produce Adjusted EBITDA of $245 million for the year. The stock only had a market cap of $4.9 billion after the big rally to $30 following the earnings report. With strong EBITDA margin expansion next year, Teladoc Health could actually trade at close to 10 times EBITDA forecasts.
The market has clearly swung too far in the opposite direction here. Stocks regularly traded at levels of 5x pre-Covid sales when telemedicine offered a lot of promise, but the company didn’t always deliver strong results. The concept has now been proven invaluable, but investors hardly want the stock.
The final P/S ratio is not the best metric for valuing a stock, especially in an area of volatile growth. In this case, this ratio provides one of the best comparison tools. Teladoc Health is now trading at the lowest multiple in its history.
In essence, the market has all but given up on equities seeing limited growth ahead. All indications actually suggest that the normal business cycle now brings more opportunities and a situation similar to that of the 2016/17 period when Teladoc was last trading at $20 and the market did not seem very interested in the telehealth story. An investor isn’t likely to see a repeat of the Covid boost, but online doctor visits could get another boost at some point, providing investors lurking in stocks with an unexpected jump.
The key takeaway from investors is that Teladoc Health is too cheap here. The market has given up on the telemedicine sector just as business begins to trickle down again.