Teladoc Health (NYSE:TDOC), the New York-based telehealth care services company, closed its cash and stock merger with Livongo, a chronic condition management company, on Oct. 30. Teladoc has glowing forecasts for higher revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). The problem is TDOC stock already more than reflects the benefits of the merger and then some.
Teladoc put together a rather interesting presentation prior to the merger. The one slide that I found interesting was on page 36. It shows a three-year projection of revenue and earnings for the two companies after the merger.
Therefore, we can use this information to see whether the TDOC stock valuation right now reflects all the benefits of the merger.
Teledoc’s Merger Projections
The projections show that the combined company’s revenue will grow 2.57x from 2020 to 2022. Revenues in 2020 of $1.339 billion (on a pro forma basis) will rise to $3.449 billion by the end of 2022. That represents a 37% average annual growth rate over that three-year period.
That is very impressive. Moreover, adjusted EBITDA for the combined company will rise to $591 million by the end of 2022. That represents a 4.69x increase over three years, or 67.4% average annual growth in adjusted EBITDA. This is even more impressive.
But here is the rub. Teladoc now has a market capitalization of $28.4 billion. This can be seen from the most recent SEC 10-Q filing on Nov. 3. At the very bottom page 1, the company has 144.96 million shares outstanding as of Nov. 3, right after the merger closed.
So, at $196.45 as of Nov. 27, the market cap is $28.5 billion (i.e., 144.96 million times $196.45 per share).
Moreover, I estimate that there is not a combined $749.3 million net debt with the combined company. This raises the enterprise value calculation to $29.226 billion.
The Expected Value Is Already In the Price
Therefore, the enterprise value-to-adjusted EBITDA multiple is 49x (i.e., $29.226 billion divided by $591 million). Even if we discount the future value of the enterprise value by 15% for three years, the discount factor is 65.75%.
Therefore, the present value for Teladoc with its EV-EBITDA multiple is 32.5x (i.e., 49x multiple times 65.75%). That is still a very high ratio. It means that one would have to wait 32 years to fully pay off the acquisition if EBITDA did not continue growing over time.
Now that is not likely, but it still shows how high a valuation at which TDOC stock is currently trading. It basically implies that all the forecasted future benefits, at least over the next three to five years, is already priced into Teledoc stock.
That implies that TDOC stock might not have much upside left in it.
What To Do With TDOC Stock
To be fair, most analysts covering TDOC stock are still very positive about the new combined company. You can see this quite well on a Barron’s page which shows that more analysts, now up to 18, have written “buy” reports on the stock. In fact, the average target price is now $247.20, or 26% higher than current prices.
And why not? The company has had nothing but continuous growth, including organically and from acquisitions since its IPO in 2015.
This quarterly growth is the focus of a recent report in Seeking Alpha. The analyst, DTF Capital, estimates that by 2025 Teladoc will generate $6.4 billion in revenue and about $1.2 billion EBITDA, or a 20% EBITDA margin.
The analyst concludes that the stock could be valued at 20x sales by 2025, or $128 billion. Its present market cap is $28.5 billion, as I wrote above. That represents a 4.49x gain over five years, or 35% annually.
The only problem with this assessment is that it assumes an EV-EBITDA ratio of 106x (i.e. $128 billion divided by $1.2 billion). That is an out-of-control valuation.
Moreover, a ratio of 20x sales is normally what a price-earnings ratio will be, not a ratio of sales. In other words, it assumes the market will irrationally price the stock in the future.
Don’t count on it. At some point, the valuation for TDOC stock has to come down to reality.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.