Teladoc Health (NYSE:TDOC) announced on Jan. 12 that it was buying InTouch Health, a leading provider of telehealth solutions for hospitals and health systems. The $600 million cash-and-stock deal sent TDOC stock spiraling higher.
Up 55% over the past 52 weeks and trading within dollars of $100, I can’t help but wonder if Teladoc has anything left in the tank.
Teladoc’s Enthusiastic Story
In October, I listed a group of 10 stocks that I thought were worth shorting. It’s not that I believe in shorting stocks, it’s just that I happened to read about a professor who felt the rising short-interest ratio was a sign the markets were getting ahead of themselves.
On a hunch, I selected 10 stocks with high short interest and short ratios. Teladoc made the list with 24 million shares short and a short ratio of 18.3 days.
“As we’ve experienced in recent weeks, investors have become less enamored with money-losing unicorn IPOs resulting in poor first-day trading, or in the case of WeWork, the canceling of the IPO altogether,” I wrote Oct. 8. “With Teladoc not likely to make money for some time and possessing an exceptionally high short ratio, investors might come to the conclusion that it’s not just money-losing IPOs that deserve a dressing down.”
In hindsight, we can see that anyone who took up my suggestion got taken to the cleaners. TDOC stock gained 47% over the final three months of 2019. And it appears ready to keep riding higher in 2020.
According to the Wall Street Journal, Teladoc’s short interest at the end of December was 23.5 million shares, down 6.6% from the end of September, representing 32.8% of its float. That’s slightly lower than when I wrote about Teladoc in October, but only marginally. It seems there are investors out there who believe TDOC stock has come too far, too fast.
That said, its latest jump is a sign there are others that believe there’s more to Teladoc’s story than accumulating financial losses.
The Year Ahead
On Jan. 13, Teladoc CEO Jason Gorevic appeared at the JPMorgan Healthcare Conference in San Francisco, only a day after announcing its big acquisition.
Gorevic revealed that the company had a record fourth quarter with sales expected between $155 million and $156 million, well ahead of its previous guidance. Further, it expects fiscal 2019 revenue of at least $552 million when it reports these earnings in late February.
Based on this revised guidance, Teladoc expects quarterly and fiscal-year growth of 26% and 32%, respectively.
Add in InTouch Health’s $80 million in sales — a 35% year-over-year growth rate — and you have a very enticing story. Based on $632 million in pro forma 2019 sales and a 30% growth rate in 2020, Teladoc should finish the coming fiscal year with sales of $822 million. If it maintains this growth rate in 2021, it will cross the $1-billion threshold.
That is a nice story.
However, through the first nine months of 2019, on a GAAP basis, Teladoc lost $79.8 million, $7.6 million more than in the same period a year earlier. In 2018, it lost $97.1 million. In 2019, that number loss should come in around $107 million.
For those who like to play with financials, Teladoc finished fiscal 2018 with $13.4 million in EBITDA, much improved from an EBITDA loss of $12.5 million a year earlier. At the end of September, it had adjusted EBITDA of $16.6 million, $3.2 million higher than in all of 2018.
I would expect Teladoc’s EBITDA for the year to be approximately $27 million, double what it was in 2018.
So, its pathway to profitability is on course. The question is whether it can get the ball over the goal line and make money on a GAAP basis.
The Bottom Line on TDOC Stock
I’m not a fan of money-losing stocks.
It’s not because they’re losing money, per se, but rather it makes them much harder to evaluate. I can live with a stock whose company delivers 12% revenue growth in a year, three percentage points less than analyst expectations. These things happen.
However, Teladoc’s been a public company for almost five years now, and yet it struggles to make money. That makes me wonder if its subscription model can work. And that’s despite the fact it grew its total U.S. paid memberships by 55% in the third quarter to 35 million.
Is Teladoc an Amazon (NASDAQ:AMZN) in waiting or more like Wayfair (NYSE:W), destined to lose money indefinitely?
I have no idea.
What I am prepared to say is that shorting TDOC stock at this stage of the game is probably a really bad idea.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.