Why I Own TDOC

Investment Analysis Clubs Saul’s Investing Discussions
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Hey everyone,

Really wanted to do a thorough post on this, but I’m slammed with stuff outside investing (what gives?!). So I’ll make this iterative and I really hope others will get involved in this thread to help flesh out the pros/cons to TDOC. I’d love to hear both!

I will likely not purchase any more shares, and would probably cap this at about a 10% position size if it grows that much due to some of the risks. That could change if the financial outlook strengthens over time.

Position Size and Purchase Price

I started about a 2.5% position in December 18 which is up about 30%, then I made another small purchase recently so it’s about a 4.5% - 5% position for me now and in total, my return is 22%. Average Buy Price is $49.19.

Initial Thesis

I believe virtual/remote health has the potential for massive growth and Teladoc appears to be a leader in the space. They have a strong network of customers and doctors. Their network of doctors and customer relationships are what I view as their moat, competitive advantage, etc. Building those networks is capital intensive which makes it hard for others to do, and once a customer is onboard with Teladoc and anywhere from say 500-200,000 of their employees begin using the platform and building relationships with doctors, it’s gotta be pretty sticky.

Numbers

3Q18 High Points:

1. Third quarter revenue grows 62 percent year over year to $111.0 million

2. Total paid membership grows 18 percent year over year to 22.6 million

3. Third quarter total visits grow 110 percent year over year to 641,000

* Date shown is date quarter ended*
Quarterly YoY Rev Growth // Gross Margin

Sept. 30, 2018 61.63% // 69.21%
June 30, 2018 112.1% // 70.7%
March 31, 2018 109.0% // 70%
Dec. 31, 2017 106.3% // 71%
Sept. 30, 2017 112.0% // 76%
June 30, 2017 68.34% // 78%
March 31, 2017 59.54% // 72%
Dec. 31, 2016 65.20% // 73%
Sept. 30, 2016 62.12% // 78%
June 30, 2016 44.88% // 74%
March 31, 2016 63.08% // 70%
Dec. 31, 2015 75.13% // 71%
Sept. 30, 2015 83.15% // 78%
June 30, 2015 77.69% // 74%
March 31, 2015 75.27% // 68%

Sales and Marketing as a % of annual Revenue (we want this going lower):
2017: 41%
2016: 50%
2015: 50%
2014: 44%
2013: 43%

Notes from 2018 Investor Day

These are my very, very rough notes from about the first 30-45 mins. I strongly encourage anyone interested to listen here: http://ir.teladoc.com/investors/default.aspx

Notes:

CEO Opening Remarks
Moat - Only comprehensive virtual care delivery solution
Moat - Global footprint with significant growth opportunities
Salesforce - long term customer that has now expanded to their global services

What prevents other competitors, health plans, systems, from doing this themselves and not needing TDOC?

“The reason we have an incredibly sustainable moat” it’s not single algorithm or service – but a complex set of capabilities working together that deliver market-beating value. Incredibly time intensive, capital intensive, and time intensive to do this."

Global Reach:
Entrenched distribution - in all channels to get to consumer (hospital, schools, employers, etc)

Seamless experience for consumer so it’s intuitive.

Visit volume outpacing membership growth - Visits + 63% CAGR Membership + 51% CAGR and widening utilization is accelerating.

2014-2018 78% CAGR

Government Program tailwinds: planning for 2020
Key player CMS - Center for Medicare & Medicaid services - taking much more active steps towards virtual care

21M Medicare Advantage

38M Medicare Fee for Service

65M Managed Medicaid

Pipeline:
“Very strong, very very happy with where it is this year relative to last year”

New wins Exon Mobil (worked on for many years) just went live Sept 1st for general medical & behavioral health. They saw the vision across integration and full array of services. Teledoc tried to sell direct but ended up going thru Aetna channel (150k members in a single client)

Potential red flags:

1. There are certainly some use cases that will never work with a virtual/remote format. That limits overall TAM.

2. Not founder-led (I prefer founder-led biz) and average Glassdoor ratings (3.7 I think). CEO rated in the high 70% on Glass door which is much lower than most of the CEOs from the SaaS/Cloud companies we discuss here.

3. Expenses: as outline during their investor day, this is a very, very expensive network to build. If costs get out of hand, or financials don’t show signs of strengthening over the next year or so it would be worrisome.

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Hi Austin,

thanks for posting this.

I have been in and out of this one a couple of times… as I went from being very excited to not so sure. I am still very keen on this space but need some time to understand it better.

Two big reasons for my recent exit - one, historic growth has been too much driven by acquisitions. I need to do some work to understand if TDOC has potential for long term organic growth. Second one may be a temporary but their renewal dialogue with Aetna was very unfavorable, cant remember the details but they were basically reduced to very low outcome for TDOC.

The narrative is very attractive (although highly debatable as well)… and so continue to be interested in this space.

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Austin,

Some quick points:

  1. The growth of telehealth seems like a real no-brainer to me – inevitable, and Teledoc is the leader. We can argue about how big the telehealth market will be, but I don’t think anyone argues it won’t grow massively. For Teladoc’s part, they think 417m of the annual 1b+ doctor visits could happen via telehealth. (source: https://www.fool.com/investing/2018/11/16/why-teladoc-ought-… – per Todd, around 5 minutes into the video).

  2. If you watch the part of the video above that mentions the visit-TAM, keep watching. Shannon then states that Medicare’s Advantage plan could actually now include telehealth visits…that would mean they could offer their full suite of services to all 21 million Medicare Advantage enrollees. Not sure why she used the word “could,” but if anyone has any more info please share.

  3. Their current penetration into this giant potential TAM is miniscule. Teledoc hosted about 2.2m visits in the past 12 months, so compare that with their 417m visit/year TAM. They have 22.6m US paid memberships, so even Medicare Advantage alone could double that. Imagine what else will be coming online in the next few years.

  4. I don’t mind the acquisition-based growth, because their revenue has consistently grown faster than expenses, and shares outstanding has not ballooned. Todd mentioned in that video above that their purchase of Advance Medical in 2018 for $352m gives them $63m in recurring revenue. That sounds like a pretty smart deal!

All in all, I hope they keep doing what they’re doing. They’re a lot bigger company than they were a couple years ago…

2016 revenue: 133m
2017 revenue: 233m
2018 revenue: 416m expected (high end of guidance)

…so they’ve more than tripled in 2 years. Even if the hyper-growth is always partially through acquisitions, I expect it will continue. PS ratio is only ~11, so there’s plenty of room to run here, too.

Bear

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Have not followed this but my first glance at the figures showed a short position of over 27% and at the words, some sort of legal class action which seemed a bit of a deterrent.

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Potential red flags:

1. There are certainly some use cases that will never work with a virtual/remote format. That limits overall TAM.

2. Not founder-led (I prefer founder-led biz) and average Glassdoor ratings (3.7 I think). CEO rated in the high 70% on Glass door which is much lower than most of the CEOs from the SaaS/Cloud companies we discuss here.

3. Expenses: as outline during their investor day, this is a very, very expensive network to build. If costs get out of hand, or financials don’t show signs of strengthening over the next year or so it would be worrisome.

I am hesitant to invest in TDOC for one major reason. I am a physician (with over 20 years in emergency medicine) and all too familiar with the dysfunction of the health care market. Believe it or not, we have mostly socialized medicine already. About half of health care is paid for by the government and the other half is highly regulated (price, supply, etc.). So it is not anywhere close to a free market. And government involvement is every increasing with growing pressures for almost complete government control through single payer or something similar. Although I favor free markets, this is not the place to debate the pros and cons. But it is an unpredictable aspect of the market and likely to directly impact health care providers like TDOC significantly. I have not had the best experience with some prior health care stocks likely for this reason. I do own a few health care stocks, specifically medical devices (ILMN, SYK, ABMD) but keep these limited.

I do think that telemedicine will increase over time. I think we would have much more innovation in health care delivery already if not for all the regulatory restrictions. I also think TDOC will likely do ok. But I don’t have great confidence that TDOC will outperform and I don’t have any confidence that they have any sustainable advantage or moat, especially when compared to other growth stocks.

Just my two cents.

Thanks for the wonderful analysis and I will continue to keep TDOC on my watch list.

Dave

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Now, combine telemedicine (TDOC) with wearable AI based hardware (AAPL) and the possible future becomes even more interesting. Currently, the available hardware to monitor health data is rather limited or too expensive and clumsy. But with increasing use of AI and more clever sensors, like the Apple watch, there will be much more meaningful data available long before there would be a real doctor visit.

The way telemedicine will work in 5 or 10 years, will be (imho) so much different to what we do now. Combine the “on site & real time” data gathering with AI to predict issues long before real symptoms appear and combine that with the upcoming trend of personalized medicine and you get an exiciting idea, of how players like TDOC, AAPL and mybe NVDA might evolve. And let’s not forget the security aspect, maybe BB and ZS, to keep the data flow (relatively) secure.

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Yeah my wild prediction is that Apple acquires TDOC in 2019… it just makes so much sense with the watch. IMO

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1.5 Yelp Stars

For example:

“This is a scam. Had a five minute conversation with the doctor for cough , sore throat, and spitting up dark green mucus. The doctor didn’t have any follow up questions once I mentioned I’ve only had symptoms the last seven days and suggested that I use some Flonase. Flonase? Really? I can barely talk. Do yourself a favor and see a doctor In person even if it means going to an urgent care because if you are actually sick Teledoc is a waste of time.”

and

“After filling out History, the first Doctor attempted to help with the pain I was having. They promised a prescription, further guidance with a x-ray or CT scan, and would send an exercise schedule. The prescription they sent was inconsistent with my History, I could not use it. No schedule ever came. A second Doctor said there was nothing they could do for me and suggested that I take warm baths with magnesium salts. The pain remained and I was no better off. I called back to request a refund, but their policy is that once you get to meet with a Doctor, no refunds are issued. So beware: even if the Doctor is incompetent, can’t help you, or gives bad advice, you can’t get a refund.”

SO:

The complete ratings on Yelp certainly make one wonder if the legal actions against Teladoc are the result of the only unethical things they - are alleged to have - done.

For example, Teladoc’s 1.3 Star average rating on Yelp consists almost exclusively one star reviews, with a few five star reviews sprinkled in.

Well, at least ONE of the five star reviews appears legitimate. Here is the critical phrase:

“and I was lucky to get a great doc,”

Lucky?

I cannot imagine putting my health - my health! - in the hands of the sort of doctor who would be in the position to take this type of work. I realise that some people eat at McDonald’s, thus some people would be satisfied with this quality of medical “care”. Statistically, this numbers seems to be about 1 out of 40 (assuming, as one naturally would with a company I’m certain has been chastened by all of the legal action against them, none of the five star reviews originate in a Bangladeshi sweatshop. Although I imagine, some day, that is where their doctors might be…)

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Shannon then states that Medicare’s Advantage plan could actually now include telehealth visits…that would mean they could offer their full suite of services to all 21 million Medicare Advantage enrollees. Not sure why she used the word “could,” but if anyone has any more info please share.

Medicare Advantage, at least in the Southeast US, is typically mostly HMOs and in many cases free to the consumer. There are obviously other MA plans that have costs and other aspects, but thats probably 80-90% of what it is where I live.

Last year the government office for Medicare Service (CMS) proposed adding telehealth coverage to Medicare Advantage plans by 2020. It was open for public comment through 12/31 and I would expect a final resolution sometime this year. It doesn’t guarantee that they would use TDOC, but I don’t really see another option at this point. It also wouldn’t even start until 2020.

It is a positive development, but not confirmed as of yet.

  • Epictetus
    “We have no power over external things, and the good that ought to be the object of our earnest pursuit, is to be found only within ourselves.”
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