The revenues of Teladoc (NYSE:TDOC) are likely to climb meaningfully going forward. Still, given the likely intense competition that the company will face, the high valuation of TDOC stock, and the strong chances of its revenue growth slowing, I suggest that investors sell the shares.
As InvestorPlace columnist Luke Lango pointed out in his column published back on Jan. 31, “the telemedicine field has exploded in popularity over the past few years.” That explosion has enabled Teladoc’s top line to grow ten times since 2016 and soar nearly 110% year-over-year last quarter. Moreover, the company’s user base jumped 80% YOY in Q3, although the firm is not expected to be profitable for the full year.
And, on one more positive note, a few months ago, Teladoc agreed to merge with its competitor, Livongo, whose Q3 sales soared 114% YOY to $395 million. Synergies between the two companies, along with their growth, will probably result in the combined company becoming meaningfully profitable down the road. A Seeking Alpha analyst estimates that its 2023 EBITDA, excluding certain items, will come in at $600 million.
According to Healthline, “Teladoc was one of the first telehealth providers in the United States. They have maintained a highly favorable rating among physicians and patients.” Consequently, I think the company has a strong first-mover advantage.
On the other hand, there are nine other telehealth companies on Healthline’s list, and a few others also won high praise from the website. So Teladoc has a meaningful number of strong competitors.
After thinking about the issue for a bit, I realized that’s not too surprising. After all, to launch a successful telemedicine service, all that a company needs is some doctors, a website, and a decent marketing budget.
When it comes to the latter item, I believe that, for $10 million-$20 million of marketing spending, websites can get enough traction to stay in business. So Teladoc’s competition is likely to remain strong going forward and could even greatly intensify.
A High Valuation and Slowing Revenue Growth
TDOC stock is trading at a rather huge valuation of roughly 15 times analysts’ average 2021 revenue estimate. And analysts, on average, don’t even expect it to be profitable next year; their mean estimate for the company calls for a 62 cent per share loss in 2021.
Even Lango, the other InvestorPlace columnist who’s generally very bullish on telemedicine and TDOC stock, wrote at the end of January that the shares, which had reached $100, “may take a breather” over the next year.
Amid the novel coronavirus pandemic, which had not reached the U.S. as of the end of January, TDOC stock, pushed higher by the increased demand for telemedicine, has soared to around $200. But like most of the trends inspired by the coronavirus, I expect telemedicine to generate slower growth as fear of the virus eases and vaccines are released.
Indeed, Teladoc itself appears to expect its top-line growth to radically slow after the pandemic is over. As recently as July, the company said that it expects its sales, excluding acquisitions, to rise just 20%-30% year-over-year over the long-term. It delivered 90% YOY growth last quarter, excluding acquisitions.
Such a decline would be logical. After all, it’s often easier for doctors to makes diagnoses when they can examine patients in-person. Moreover, many patients, especially older ones, will feel much more comfortable discussing issues and building relationships with their doctors in-person than on video conferences.
The Bottom Line on TDOC Stock
As a Seeking Alpha columnist recently contended, with overseas expansion, additional acquisitions, and increased awareness and acceptance of telemedicine, Teladoc is likely to grow significantly in coming years.
Still, given the shares’ very high valuation, the company’s tough competition and low barriers to entry, and the high likelihood of its growth slowing in the medium term, I urge investors to unload TDOC stock at this point.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.