TDOC - Why I got out.

Investment Analysis Clubs Saul’s Investing Discussions
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Thanks to duma for finding my post on TDOC for me again. My post was from just three months ago (Jan 2018) and I haven’t followed the company since, so I’m not up to date, but I think that the concerns I mentioned must still be relevant. So here it is again for those who are interested (with a few small updates made today). Look, they may do great, but these are just my thoughts:

I had a small position briefly early in the year (2017). I thought that doing some medical appointments by phone, and saving medical costs, is something that insurance companies and enterprises would both jump at. However I realized that a telephone “exam” is only good for patients that you have no need to examine physically, or for a preliminary screening, or something like that. But they were losing money and losing a little more each quarter than the year before. I got out when they bought Best Doctors, which is a consulting-at-a-distance service, and a totally different, 30-year old, stable business. [“Send us a copy of all your records and we’ll have one of our specialists evaluate them for you and report back.” That seemed unrelated to Teledoc’s business to me.]

I thought I’d take another look at it, again thinking that doing some consults and saving medical costs is something that insurance companies and enterprises would both jump at. Maybe a wave of the future? Here’s what’s holding me up"

First, here’s why I didn’t like the acquisition
Teladoc paid $440 million!!! Remember that Teladoc had only $123 million in revenue in 2016, and was on track for maybe $180 million in 2017. So that $440 million was a bundle for them! They paid well more than twice their own annual revenue. And for a nearly 30-year old business that generated just $6.5 million of EBITDA in 2016. It’s almost unbelievable that they paid that much!!!

The huge acquisition takes them from a $134 million net cash position at the end of the Mar quarter to a net debt position of roughly $300 million. That’s a lot of debt for a business with a combined revenue run rate of about $280 million, and growing losses. How are they ever going to pay all that debt back, aside from selling more shares and further diluting (more on that below).

Second there’s the growing losses
Loss for 2016 was $74.2 million, up from losses of $58.0 million the year before. That’s losses growing by 28%.

3rd quarter loss was $31.3 million, up from $29.8 million,
For the 4th quarter they are predicting losses of $24.0 million up from $14.3).

[That was what I wrote in January. Here’s what they actually reported:]
4th quarter 2017 net loss was $44.4 million for the compared to $14.3 million in the 4th quarter 2016. (So I was worried that they’d lose $24 million, up from $14 million, but they lost $44 million!) For the full-year 2017, net loss was $106.8 million compared to $74.2 million in 2016. Losses were up 44%. It was even much, much worse than I expected. ]

Thirdly there’s the massive dilution.
Weighted average shares for the first nine months were 54.4 million, up from 41.1 million the year before at that time. That’s up 32% in one year.

If you are in Teladoc, what are you seeing that I’m not??? I know they are signing up businesses, but what about the debt, the losses, the dilution?

Thanks for any help,

Saul

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If you are in Teladoc, what are you seeing that I’m not??? I know they are signing up businesses, but what about the debt, the losses, the dilution?

Thanks for any help,
Saul

Doesn’t look too good when you look at it that way! :wink:

Saul:

I will keep this short because we have been through this before but stocks like TDOC are similar to NPI and Gorilla game stocks of years past. They have “stories” and that is what people are investing in.

I have observed over the past couple years that some of the best performing stocks have been “story” stocks. I have commented a few times on this observation and it often comes with incredulous confusion when a more disciplined investor looks over the numbers and can’t grasp why anyone would be invested. But…regarding your holdings…you have morphed into a more typical NPI type investor…Bert is certainly such…you may not like the characterization but welcome to our world! :wink:

After all, most of your recent holdings in your portfolio have no earnings (NKTR, SHOP, TWLO, AYX, PSTG, OKTA, NTNX, TLND, HUBS, SQ) although these two do have earnings (NVDA, ANET) and a few of the no earnings appear to have future PE’s.

For sure, biotech investing cannot be more risky and for which none of the financial metrics you applied to TDOC would ever pass muster…but you still invested in them and made a great deal of money.

This is not in ANY WAY to be critical of your portfolio, many which I also have owned and done amazingly well also, but merely to suggest that perhaps your style has really changed and yet you still struggle with not applying the more formal financial metrics to your other stocks. But try applying them to what you already own and you might be selling a number of them.

Point being, TDOC is a “story stock” as well…even with all its warts…its story will be much more clear in 2 years, at which time, they claim they will be cash positive.

The “story” is the following:

  1. They will reduce costs to insurance companies and patients
  2. They will reduce wait times and inconvenience (average wait time is 10 minutes)
  3. Hospital systems and insurance companies are signing up in droves (factual if you read their earnings report)
  4. They will be used for behavioral modification (preventing readmissions from diabetics, alcohol, heart failure patients, etc.)
  5. They will supplement the primary care doctors refusal to provide after hours care
  6. They will reduce flu exposure to health care workers
  7. They may be used for psychiatric followup care
  8. They will be used to provide solutions to patient engigmas that local doctors cannot solve
  9. They will bring better care to underserved markets through telemedicine
  10. They can be used to determine appropriateness of transfer to academic centers
  11. They are working with MSFT very closely to establish cloud based medical care and likely AI

This is the storyline…it is compelling…it may be completely wrong…but this is typical of NPI type stocks IMO…and the story has driven up many stocks like SHOP to P/S’s over 20.

You already own many stocks that fit the “storyline” thesis I am suggesting exists. I would love to know if your many years’ prior investments have been these type of stocks with little to no earnings? If not, you have most certainly proven again your ability to go where the money is in stock investing because I really believe this has been the investment theme this past couple years.

So yes, it has been a good investment, up over 50% for me and I think a double from its IPO. These story stocks can trade up for some time as you well know, perhaps the golden child of them all until 5 years ago was TSLA…but so many more examples.

If I could also again address your criticism of the Best Doctors purchase, you are correct at a superficial glance…they appeared to overpay and that earnings were not much accretive. Their argument was that the true value was not unlocked in this purchase for reasons I previously explained and as you may have noted in just the past quarter, $35 million or so in revenue was from Best Doctors (more than entire previous year)…this before they have completely assimilated it in their business model. They contend there is at least $200 million cross selling opportunity from Best Doctors so what if I told you they bought it for 1 times sales??? Doesn’t look quite as bad.

I have kept this very brief as there isn’t much interest here I know. Importantly, keep in mind that there is a very persuasive bear argument that I haven’t even detailed for you so I am not suggesting anyone go invest in this or any other stock nor do I fall in love with any stock either.

Best:
Duma

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After all, most of your recent holdings in your portfolio have no earnings (NKTR, SHOP, TWLO, AYX, PSTG, OKTA, NTNX, TLND, HUBS, SQ)

Thanks duma for taking the time to express the Bull hypothesis so clearly and thoroughly. I assume there that you must be referring to GAAP as Square, for instance, has had positive real earnings for the last six quarters, Hubspot for four quarters, and Shopify for the last two quarters.

I guess I see a really big difference between most of my stocks and TDOC.

As I said: But what about the debt, the losses…?

Let’s look again briefly at Teledoc. As I read it they have a total net debt of $311 million, with losses last year of $107 million, which losses amounted to 46% of revenue, and which loss rose 44% from $74 million the year before !!!

Losses last quarter of $44 million gives them a run rate of losses of $176 million, all of which gets tacked on to that $311 million debt next year.

That’s for a company with combined revenue of only $233 million!!! How the heck will they ever pay back all that money?

Losses were $1.93 per share! (And let’s note that when they give their adjusted EBITDA figures, by the definition of EBITDA they don’t count the interest that they are paying on that $311 million and growing debt).

Let’s compare to Shopify, for example. Their cash was $938 million. No debt. Right there, that’s enough to put them in an entirely different category!!! Now they had revenue of $673 million, roughly three times the revenue of Teledoc. Their GAAP net loss was 6% of revenue, or $40 million for the year. Compare that with Teledoc’s losses of 46% of revenue. And Shopify’s adjusted net income was positive $15 million, which means $15 million gets added to their cash. Does anyone still think these two companies are comparable?

Since you mentioned Alteryx too, let’s see. Their Net Cash position was $194 million, up $11 million sequentially, meaning they were cash flow positive $11 million for the quarter. No debt. Revenue was $132 million. They had a GAAP net loss of $19.5 million (15% of revenue, and falling from $30.7 million a year ago on a lot less revenue. None of those rapidly rising losses that Teledoc has shown every year). Their adjusted net loss was $6.4 million which was 5% of revenue, and also falling.

Can anybody see why I might prefer these two rapidly growing companies, with lots of cash, and rising, to Teledoc with its huge, huge growing losses?

Best,

Saul

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Thanks again Saul for another Great investing lesson!
I Love this analysis is finally helping me to understand these companies without p/e

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