Teladoc Stock: Massive Reversal to Stun Bears (NYSE: TDOC)

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Thesis

We highlighted in our previous article that the market anticipated that Teladoc Health, Inc. (New York Stock Exchange:TDOC) operating metrics may have bottomed out, even as we approach (or are already in) a recession.

We argue and evaluate that significant damage had already been inflicted and moderated on Teladoc’s unsustainable COVID-driven growth. As such, it should help the company return to more “normal” growth as it overcame difficult competitions and benefited from the improvement in its multidisciplinary approach to telehealth.

Therefore, we were not surprised that Teladoc reported better Adjusted EBITDA profitability metrics than previous guidance. When management and The Street set the bar so low, it helped Teladoc meet their projections with relative ease. Therefore, we believe that management may have limited expectations to demonstrate that it could still execute well and meet/exceed guidance.

We believe that TDOC has passed its first litmus test in the third quarter. Furthermore, we found that TDOC has already been consolidating since May 2022, suggesting that the market did not expect to lower TDOC’s rating further unless results were hugely disappointing.

So management is right again, though investors need to clear their heads if they still expect a quick recovery towards their 2020 highs. Please remember those days are behind us. If you bought at those highs and are still in the game, it would be a long wait, if anything.

Investors looking to add to current levels should be prepared for a possible pullback, given last week’s sharp rise. Therefore, we urge investors to consider investing in layers, taking advantage of potential dollar cost averaging opportunities.

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Hold speculative buy with $40 medium-term price target (PT), implying 36% upside potential.

Teladoc: Return to Profitability Growth

Consensus Estimates of Teladoc Adjusted EBITDA Comparisons

Teladoc Adjusted EBITDA Compensation Consensus Estimates (S&P Cap IQ)

Teladoc reported $51.2 million in adjusted EBITDA for FQ3, well above previous consensus estimates of $40.4 million. Notably, it also outperformed the upper end of its guidance range, buoyed by strong growth and better margins from BetterHelp.

Teladoc’s fourth quarter Adjusted EBITDA estimates have been lowered slightly, given the company’s fourth quarter outlook. Despite that, the market still reacted positively to its third quarter report. We believe the market has justifiably re-rated the administration’s ability to execute, indicating that Teladoc has greater credibility in delivering its guidance moving forward.

Teladoc Revenue % Change and Consensus Estimates of Adjusted EBITDA % Change

Teladoc Consensus Estimated Revenue % Change and Adjusted EBITDA % Change (S&P Cap IQ)

However, we must highlight that the administration has not expressly guided for FY23. Nonetheless, management’s comment on its earnings call suggested it remains optimistic about the rate of recovery of its Primary 360 business.

Furthermore, it appears to be gaining share in the fragmented market as customers turn to holistic platforms like Teladoc’s in worsening macro conditions. Thus, Teladoc is showing its strength as a leading player in the space, as CEO Jason Gorevic articulated:

We are definitely seeing an impact from a tighter economic environment and a higher cost of capital affecting some of the smaller companies. In fact, I was with a very large client yesterday, and frankly, the challenge for them is questioning whether some of those smaller companies are going to be able to survive is definitely the most important thing for them. So I’m not sure to say we’ve seen a massive reorganization yet, but I hear quite a bit from customers and other health care companies that they’re very much in tune with that. (Teladoc FQ3’22 Call for Results)

Thus, Teladoc’s market leadership has benefited from its recovery momentum. However, we encourage investors to continue to monitor their ability to take more share from smaller competitors in the future.

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Is TDOC Stock Buy, Sell, or Hold?

TDOC’s price remains higher than its health technology peers. In particular, its NTM EBITDA multiple of 19.1x remains well above its peer median of 7.4x (based on S&P Cap IQ data). Therefore, the market has given TDOC’s market leadership a superior valuation which it must justify.

TDOC Price Chart (Weekly)

TDOC Price Chart (Weekly) (TradingView)

We had anticipated its May/June 2022 lows to hold. But the market had other ideas as it forced a quick sell-off in September to form its October lows for four weeks.

However, that move turned out to be a cunning bear trap, forcing weak holders to capitulate while trapping bearish investors into taking short exposure at the worst possible times.

Last week’s reversal has helped TDOC retake its critical short-term support decisively. Given the magnitude of the spike in momentum, we expect some digestion before consolidating. While we expect a pullback towards its May/June lows, we do not expect a decisive breakout of these levels.

Therefore, it seems increasingly likely that TDOC has already bottomed out in May.

Hold speculative buy rating with $40 medium-term PT.

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