Teladoc Bear Case

Investment Analysis Clubs Saul’s Investing Discussions
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I read through a bearish article on Seeking Alpha about Teladoc.

https://seekingalpha.com/article/4401582-teladoc-stock-up-47…

Reading through, I find that the points the author makes really resonate with Saul’s thinking.

The first argument is that Teladoc has a high cost of goods sold. Every new appointment requires payment for the doctor’s time. As a result, as revenues grow, gross margins are pressured. This is in contrast to a pure SaaS company where there is little to no extra cost involved in adding a new customer. I remember Saul making this exact argument in rejecting the Teladoc thesis.

It just makes sense. SaaS companies have a clear path to profitability as their costs do not increase alongside their revenues. For companies like Teladoc, the path is less clear.

In the meantime, Teladoc is issuing more and more stock. The author of the Seeking Alpha article points out the noteworthy disparity between the growth of Teladoc’s share price and Teladoc’s market cap.

The bear case makes sense to me.

And yet…The Fool loves Teladoc. Cathy Wood loves Teladoc. I know some people here love Teladoc. So I’m really curious. What is the counter to this bear argument? Any bulls care to speak up?

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I think the bull case focuses more on Livongo than Teledoc’s pure telehealth play. Livongo’s business model IS more like the recurring revenues of our other SaaS companies, because they target chronic disease.

Teledoc by itself would suffer exactly as your bear thesis describes. Each telehealth visit is episodic, with low gross margins, and with little predictable recurring revenue. But with Livongo patients, who have diabetes, hypertension, or mental health issues, each patient is a long-term, recurring revenue patient.

To make it crystal clear, I don’t own TDOC, nor did I ever own it. Ditto for Livongo back in the day. But I think the merger was a life-saver for TDOC, allowing it a consistent and growing revenue stream from Livongo while it survives the initial ‘valley of disillusionment’ that the whole telehealth industry is going through. I honestly think that there is a valid and growing marketplace for telehealth, especially in areas that have poor healthcare today. Within the US, most rural areas are woefully underserved by existing healthcare systems, and telemedicine should be a huge help. I just don’t know how to project cash flows from providing such services.

Those are my thoughts. I am not particularly bullish nor bearish on TDOC in the short term (1-3 years). But I maintain that TDOC may find its legs over the long haul.

Tiptree, Fool One guide, no position in TDOC I

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Teledoc by itself would suffer exactly as your bear thesis describes. Each telehealth visit is episodic, with low gross margins, and with little predictable recurring revenue. But with Livongo patients, who have diabetes, hypertension, or mental health issues, each patient is a long-term, recurring revenue patient.

Agree. Livongo was literally a life-saver to many diabetic users. It was an expensive package, yet the insurance companies paying for it all saw it as a money-saver. They were happy to pay for Livongo.

A high-margin SaaS product with (at the time) a small and rapidly growing penetration of the diabetes market, where they insurance companies paying the bills were saving millions through its use. What could possibly go wrong?

A slower growing lower margin company swallows them. Lesson learned.

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And yet…The Fool loves Teladoc. Cathy Wood loves Teladoc. I know some people here love Teladoc. So I’m really curious. What is the counter to this bear argument? Any bulls care to speak up?

The bull case for TDOC has been made repeatedly here. I would suggest searching Saul’s board for discussions. I believe Digized has made a thorough analysis and bull case. I would also suggest reading Seeking Alpha bull articles, maybe the one by Bert Hochfeld last August. Or you could read MF’s analysis if you subscribe.

It’s fairly simple. They are the dominant rapidly growing player in a rapidly growing sector with a likely massive TAM. The combined TDOC/LVGO confers unique advantages and synergies. Here’s a video explaining the basic thesis.

https://www.marketwatch.com/video/sectorwatch/how-telehealth…

Dave

Long TDOC (after owning LVGO)

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Just to be clear, I’ve read many bull cases for Teladoc. What they all have in common is the focus on the massive market opportunity and top line growth.

The bear argument I linked discusses the issue of profitability and compressing margins. This is not something that I have heard bulls talk about. If you are bullish on Teladoc, you must believe that this is not a concern.

Saul has made it very clear why metrics like P/S are not relevant for companies like Datadog, Zoom, Crowdstrike, and Okta. This isn’t because profit doesn’t matter. It’s because these companies have spring loaded profits that will explode in the future. The author of the article I linked has the specific thesis that Teladoc cannot be compared to these businesses. My question was, “Why should Teladoc be valued like a SaaS business?”

I read Digized’s (Richard’s) Bull case, and there is a lot to be said about Teladoc’s dominance and market opportunity. I did not see much discussion about profits. The word profit only appears in the write-up three times.

TMFTiptree’s response was helpful - the idea that the profit will ultimately come from the Livongo side gives me something to look into.

I did find this paragraph in Richard’s writeup that addresses my concern, “Furthermore, I believe the SaaS comparison is warranted; although 25% of Teladoc’s standalone revenue is derived from visit-fees, the Livongo merger improved visibility, is accretive to gross margins, and expanded Teladoc’s competitive positioning and TAM considerably as previously discussed by providing the ability to provide more longitudinal care and experiment with new payment models. In addition, because Livongo’s engagement rates are much higher and ROI is transparent and easily measured, Teladoc should face less pressure to adopt unfavourable contracts.”

Thank you for pointing me there.

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Amazon was a retailer…
Apple sold hardware devices…
Tesla sells cars…
Netflix has very high cost of producing original content…

none of these are SaaS businesses with recurring revenue (except NFLX, though its easy to switch unlike salesforce etc)…

What they are very very large size markets and these guys disrupted them very successfully…

What Teladoc is doing is disrupting this very large market… it is not just a tele-visit to a doctor… that as a narrow service can be very brutal business due to low margin… what Teledoc is doing is tele-visit (classic TDOC), chronic health management (LVGO), remote patient monitoring and treatment (Intouch)… complete virtual healthcare provider (upcoming) and I would not be surprised if they introduce their own insurance in a year or two…
It is a vertically integrated, digital first, virtual health service provider… you have to foresee where it is going to value it right. In rear view mirror, you will always find problems with it.

It was $123M in revenue in 2016, it just crossed $1B, if you still cant buy into it, you never will.

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While true that TDOC’s visits are low margin, they are increasingly moving more contracts to subscription access. While high utilization can result in lower margins, Teladoc mentioned some subscription contracts re-rating throughout the year which helped drive PMPM. They are guiding for an adjusted EBITDA margin of 15-18% by 2023 expanding at 200-300 basis points annually.

And I would re-iterate what I mentioned in my article that the crux of the thesis is Teladoc enabling a healthcare system that does not rely on doctor’s visits. In a future where patients are remotely monitored with Livongo and are only escalated to a physician visit when required, a big chunk of healthcare costs are going to go away and Teladoc has consistently talked about benefiting from that under shared savings arrangements. That’s a model where costs don’t increase linearly and should start to drive margin improvements once VPC fully rolls out.

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“It was $123M in revenue in 2016, it just crossed $1B, if you still cant buy into it, you never will.”

Great post Nilvest.

All the reasons why I’ve been building a very very large position in TDOC. Not everything happens overnight and believe it or not there are great companies outside of the cloud based subscription model that are great investments. ROKU is another great investment that comes to mind. ENPH?

I love a any company that has the opportunity to disrupt an industry. TDOC fits that for me.

FYI. I’ve owned AMZN, AAPL and NFLX for two decades now and those three companies alone is why I have the financial freedom that I have now. Hoping that holdings like ROKU, CRWD, TDOC and others give me more of the same in the future.

TMB

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There are a number of concerns that need to be considered–

Healthcare is a low profit margin business, particularly primary care, which TDOC offers. Unable for patients to come to the doctors’ office for care also cuts the profit margin even further (no ancillary service revenues unlike traditional in person primary care practices).

Many state medicaids and managed medicaids have notified healthcare professionals that they will stop covering for telemedicine services starting in April. Due to the pandemic, number of Medicaid patients have swelled significantly, https://www.washingtonpost.com/health/covid-medicaid-enrollm…

Some commercial payers either stopped covering or cut reimbursement to 80%. Obviously, telemedicine makes things easier for patients but how much cost benefits do the insurance payers get on annual basis? In everyone’s experience, do insurance companies make decision based on making things easier for patients?

There is also more competition (low barrier to entry?). United Healthcare partnered with Amwell and some plans currently still reimburses independent physicians for telemedicine service, https://www.beckershospitalreview.com/payer-issues/unitedhea…
Many independent practices also continuing to offer telemedicine services without being on platforms such as TDOC and Amwell.

There are upcoming liability concerns, particularly telemedicine service for new patients without able to exam the patients… our government is run by lawyers, not doctors, https://www.medscape.com/viewarticle/936664

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There are a number of concerns that need to be considered–

Healthcare is a low profit margin business, particularly primary care, which TDOC offers. Unable for patients to come to the doctors’ office for care also cuts the profit margin even further (no ancillary service revenues unlike traditional in person primary care practices).

Many state medicaids and managed medicaids have notified healthcare professionals that they will stop covering for telemedicine services starting in April. Due to the pandemic, number of Medicaid patients have swelled significantly, https://www.washingtonpost.com/health/covid-medicaid-enrollm……

Some commercial payers either stopped covering or cut reimbursement to 80%. Obviously, telemedicine makes things easier for patients but how much cost benefits do the insurance payers get on annual basis? In everyone’s experience, do insurance companies make decision based on making things easier for patients?

Yes, but… the REAL issue is preventing hospitalizations, which sop up the lion’s share of medical budgets. Any company that can offer an insurance company even a small reduction in hospitalizations, perhaps through remote monitoring or more frequent telehealth visits in lieu of in-person visits that wouldn’t have occurred, will reap significant benefits. Remember this whenever you are evaluating a medical device maker or a company like TDOC (which I hope evolves into more of the LVGO model)

Regards
Brian

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To view TDOC through the lens of a company participating in an open and free market presents it challenges. Healthcare and more particularly health insurance is a an ologopoly. Perhaps not formally designated as such, but certainly operating as such. In this environment, site of care and reimbursable rates are manipulated and dictated by the few to direct and impact both health care provider and patient behavior. Health insurance companies pick winners and losers every day. If the health insurance companies wish to see profits increase by affecting site of care and reimbursable rates associated with that care, they can make that happen. If TDOC and other telemedicine companies as well as medtech wearable devices can make that happen, then it will be the health insurance policies and procedures that will be the invisible hand moving the market. Do not underestimate the power of the health insurance companies and their ability to move a market.

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First of all - I LOVE the debate. I so much appreciate people politely disagreeing and trying to find the strength/weakness of bear/bull cases. I tend to get blinders for my high conviction companies and it’s super helpful to hear critiques from sources I trust.

Health care is a low margin business. So was selling books through the mail. Teledoc has called themselves “the Amazon of health care”. Will it be so, idk. Only time will tell. But what starts as a low margin business can evolve. There are SO MANY possible directions they can go IMO (optionality).

One of my big concerns is whether or not they can maintain the Dr. participation. If I understand things correctly, part of what they do is basically like a gig job for Dr’s. Is that scalable? Can competitors draw the Dr’s away? Will artificial intelligence take the place of some Dr’s? Will they use Dr’s in other countries? I don’t have the answers - just something I question.

My personal approach to this company is different than most here, and not very “Saul-ish”. I bought a pretty large amount when it was LVGO at ~$25. I got my cost basis out long ago when it was still LVGO. I’ve decided to just let the rest ride (because it’s too complex for me to try to figure out the bull/bear case on this one). They grew ~70%+ organic in the last quarter. They are the 800 lb gorilla in their space. They are forecasting 30% - 40% growth for the next several years. Their is a huge need for improvements in health care.

One of the best investors of our generation has been buying the heck out of it in the last 6 months since the merger drop. More than any bull/bear case anyone could give me, I am trusting her conviction. She has bought soo much TDOC that it is the 2nd largest position in all ARK funds combined - second only to TSLA. One of the key investment philosophies of ARK is that the company with the most data is going to win. I think they like TDOC so much because they will have gobs of data on their patients. ARK bought a bunch more in the last couple days since the ER.

Long TDOC. Used to be my largest position, but it has shrunk while TMDX and Bitcoin have surged - so currently it’s in 3rd place. My plan is to hold for 5 to 10 years and weather the big price swings.

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It’s an interesting time in medicine, to be sure. I’m a primary care physician and I own my practice. Just 2 docs trying to make it work and for now it works just fine. I also have a small position(about 2% of my total port) invested in Teladoc.

Agree with the previous comment up-thread about how in this country, at least for now, health insurance companies (including the federal government vis a vis Medicare) are going to be the ones who decide whether Teladoc eventually succeeds as a company. The payors control the system for the most part. Blue Cross and Humana and United Healthcare and the two or three other larger payors nationally are interested in telemedicine only insofar as telemedicine visits save them money. They really don’t care about the health of their customers (my patients). Healthy patients tend to cost less, and they do like that, but it’s the low cost they really like - not necessarily the health part! If telemed generally can be proven to save money (presumably by increasing the opportunities for healthcare providers and their patients to get together and prevent hospitalizations and other “big ticket” health expenses), then telemedicine will flourish because insurance companies get to keep more premium $$, and not because patients like the convenience of telemedicine or it makes them more healthy or any of that stuff. Insurance companies, in my experience, only care about patient satisfaction when there is enough choice in the marketplace for patients to actually choose a legit competitor. When those choices are few, they tell patients to pay up for the choices they want or to go pound salt. They say it nicely, but that’s the message. So, the argument that with regards to telemedicine “the genie is out of the bottle and there’s no going back” only goes so far, in my opinion. Insurance companies can stuff that genie right back where it came from, if they wanted to.

Here’s the point of my post though, and my wondering about Teladoc as an investor who also happens to have some professional skin in the game, and maybe a little bit of practical experience about how all this works on the ground. What is it about Teladoc as a company that will make insurance companies (and perhaps to a lesser extent large health systems or very large private group practices practices) choose Teladoc over the other options, including the option of designing an in-house telehealth system for themselves? Are they cheaper than other options for the payors? Livongo offers some great tools that have really enhanced the offering Teladoc makes, but so does(for example) a privately-held company called TytoCare, which offers smart devices that patients take home to monitor weight, blood pressure, blood sugar, etc. and allows doctors and patients to manage chronic disease more closely together. Apparently, TytoCare can provide these add-ons to existing systems. They do exactly that for the largest health system in Louisiana, Ochsner Health, which owns or operates 40 hospitals and over 100 clinics. Ochsner built their own telemedicine functionality beginning 7 or 8 years ago and currently (according to their online information) use TytoCare as a partner. This is merely one example that I know about, but I suspect that other large systems across the country have done the same. Personally, I use another solution from a company called Updox for telemedicine visits. I like it a lot, it interfaces with my EHR pretty well and it’s much more user-friendly than Zoom, especially for elderly patients. I wouldn’t consider Teladoc at this point for my practice, unless Blue Cross Blue Shield of Louisiana(which controls about 30% of my gross revenue in an average year) or Humana (another 30%) or the federal government (CMS) declared that in order to get reimbursed for telemedicine services I had to use Teladoc. And that’s sort of the point.

I’m considering exiting my position in Teladoc for these reasons but I am intrigued by the new offerings all under one roof, so to speak. I’m going to hang in there for another quarter or two and see what the growth trajectory looks like. And whether the insurance industry decides to continue to allow this sort of medical care to flourish post-pandemic.

BC

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Great posts, thanks for the info. I appreciate the doctor’s perspective a great deal.

Just a tidbit to clarify ARK’s position: Cathy Wood said she bought TDOC because of Livongo. I don’t remember in which of the many market updates, but it was back in fall.

TDOC’s share price has returned to basically where it was back then despite the growth, which makes it even cheaper relative to its growth as well as relative to many other companies discussed here.

The market as a whole seems to be seesawing between the bull and bear case for TDOC.

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Healthcare is extremely complex and fragmented. I agree with the above post entirely. I own some shares of TDOC but seriously considering exiting for the time being. A few additional points to consider–

  1. Telemedicine companies such as TDOC will need to show quality data that they save insurance companies cost. In order to do so, they need to have high quality physicians. One can build the nicest clinic, hospital, or telemedicine platform but without good doctors, then it will be difficult to sustain and provide quality care and lower cost.

  2. Due to liability concerns (a lot of doctors do practice defensive medicine), would telemedicine providers truly be able to, and be comfortable to save insurance companies cost (which a lot of it is not telling the patients to go to the ER and ordering fewer tests) when they see new patients without able to exam the patients, without having prior records of these patients?

  3. On top of the power of the private payers, there is also the government. Like I stated above, due to the pandemic, many states are seeing a surge of of medicaid patients. Many states such as Nevada, which without state income tax and is quite dependent on tourism as revenue stream, are having big budget issues so will need to cut healthcare spending–meaning likely reimbursement cuts and cutting covered services (which often times may include telemedicine service).

  4. Per the post above, many large regional hospitals and healthcare systems have built out large outpatient practices and specialty clinics. These regional hospitals and healthcare systems do have some leverage with the insurance companies. These hospital and healthcare systems can simply have their own telemedicine platforms without using platform such as TDOC.

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FWIW, Payor/insurance companies (in this case Cigna)are acquiring, and vertically integrating, Telehealth companies (in this case MDLive, one of the top four TH providers).

https://www.prnewswire.com/news-releases/as-demand-for-virtu…

“With high customer and provider satisfaction ratings, it is clear patients and providers value their experience with MDLIVE. MDLIVE also has a sizable and forward-thinking client base, a class-leading provider network, brand recognition among customers and consumers, and experience in medical and behavioral health. Together, we imagine a new end-to-end care experience to complement – not replace – the way customers and patients interact with their existing providers…”

I expect to see more M&A in this space over the next 12-18 months.

Happy Sunday!

Luis
@brandstudere

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I enjoy this thread seeing both sides of the argument. The recent acquisition of MDLive by Cigna is a clear signal that telemedicine is here to stay. There are ~1 Billion doctor visits/year in the US. McKinsey (I believe) has said that 250M visits/year can go the telemedicine route. In 2020 TDOC had 8.8 M visits in the US. They are the top dog with the largest market share. So, I can see a long runway ahead in the number of visits just in the US.

I think where the bears are correct is that telemedicine is becoming commoditized. You can see that the $/visit by TDOC’s largest competitor is just half of that of TDOC. Also, GDRX operates a marketplace where people can choose between different telehealth providers.

https://www.goodrx.com/treatment

TDOC and AMWL are also represented but they are more expensive. Normally commodity space is not good for investments. But not always the case! Amazon started in retail which is a commodity and it was a good investment even before AWS and Prime. So, that is what TDOC is trying to become. They want to become the one-stop-shop or the Amazon for telemedicine. In a recent Cowan interview, the CEO said "43% of members have more than 1 product, a few years back it was just 9%. 2/3rd of new bookings are for multiproduct vs 50% just last yr. Does this sound very familiar to errrr. CRWD, DDOG? More products means more stickiness and higher fees/member. Mental health (better health) D2C is projected to grow 50%, and their B2B visits were up 500% last year. They believe multiproduct sales, whole-person care including mental health and Primary care 360, longitudinal care (Livongo), hospital and health system relations (in touch) is their competitive advantage. All other competitors offer point solutions (amazon comparison again). Ontrak lost their largest customer (some think it was Aetna) to a competitor (TDOC?).

So, it comes to execution. Can TDOC still be price competitive (like amazon) but sheerly by offering a wide selection of offerings get more members and more spending from members? If it does it will be a good investment. The Livongo part has a much higher PMPM and over the next 2 years at least we should see a lot of revenue growth from that side both in US and internationally.

Long at 4%… May add more.

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