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Teladoc Health (TDOC: $222)

Coverage initiated July 8, 2020 at $222 in the High Technology portfolio

Company Overview. Teladoc Health has an ambitious and noble mission: Create more convenient healthcare with a better value, and outcome through a virtual experience. They wish to offer 24/7 availability. Filling a void in this space, the company sees a big business opportunity. We agree. This was true before the coronavirus pandemic, and now, telemedicine has become a necessity to control the spread of the virus. With patients and healthcare providers getting used to the arrangement, we see the trend accelerating.

Virtual doctor visits cover a range of conditions such as simple colds and the flu, and even cancer and congestive heart failure. Its services are available in 175 countries.

Teladoc sells its services to employers (including 40% of the Fortune 500), health plans (Aetna and United Healthcare are two of the more prominent customers), hospitals, and insurance/financial service companies (e.g. AIG and AXA) to help control their healthcare costs, and provide a convenient, affordable high-quality level of healthcare to their customers. For behavioral health, there is also a direct-to-consumer offering done in partnership with others.

Its primary revenue generator is a subscription-based system which are typically charged monthly. This is positive since it provides a stable and recurring revenue stream. Some clients pay a per visit fee.

The company’s challenge is to change the consumer mindset to initially look to virtual solutions. It is accomplishing this by creating a one-stop shop that can meet all of a client’s healthcare needs that uses technology and AI to streamline the process and improve outcomes.

Competitive Analysis. Teladoc faces several competitors that provide telehealth technology and telehealth delivery that allow patients to access care. Its competitors are typically smaller, non-public companies such as MDLive, Doctors on Demand, American Well, and Ground Rounds.

Teladoc confronts the competition by consistently innovating, and its large size allows it to offer access to care for a wide variety of health conditions. It primarily generates revenue domestically, and it does have a global reach that few can match.

To keep moving forward, Teladoc has been active on the acquisition front over the last few years. Most recently, it bought InTouch Health for $600 million to strengthen its offering in the hospital market.

Financial Analysis. Teladoc has been growing revenue at a rapid clip, proving that its business model works. Before the coronavirus struck, revenue grew at a compounded annual growth rate of 43% from 2015 to 2019. Last year, it rose from $420 million to $555 million, a 32% increase. Its loss widened from $60 million to $100 million during this time frame. We aren’t overly concerned since Teladoc is building the infrastructure needed to create a strong company built for long-term success. So, it has seen increased costs for items like Advertising, Sales, Technology, and General & Administrative. Operating expenses rose from $135 million to $635 million. The company's loss has hovered at $100 million in 2017 through 2019.

Turning to 1Q20, revenue grew 41% year-over-year to $180 million. Certainly, the coronavirus pandemic helped accelerate its growth. Unlike other companies that saw temporary boosts to revenue, this is sustainable for Teladoc as more patients and physicians adapt the telemedicine model when they see its efficiency. It now has 43 million paid members, 61% higher than 1Q19. 1Q20 loss was $30 million, flat versus a year ago. Management expects revenue to rise 50% this year from $555 million to $815 million.

Revenue growth is not translating into profitability – yet. With its growth, it is only a matter of time before the business scales and leverages operating expenses. During the quarter, it added 6 million paid members, and its customer acquisition cost was $5.24. Its basic consultation costs $49, so the numbers work.

The balance sheet is in decent shape, too. There is $510 million of cash and $480 million of debt.

Stock Performance. The stock has been a big winner this year, rising more than 155%. Major institutional investors own Teladoc, including BlackRock (10% of the company), Vanguard (9%) and JPMorgan Chase (7%).

BMR TAKE: The company offers big upside potential. With its broad offerings, it is at the forefront of a trend set to accelerate. Telemedicine is only in the early innings and Teladoc’s strong market position means it is poised to benefit for a long time.

We are initiating coverage with a $252 Target Price and a $175 Sell Price.