Teladoc Health (NYSE:TDOC) and the company it merged with — Livongo — were big winners in the novel coronavirus trade. Livongo and TDOC stock soared as telehealth was becoming the new norm.
The two stocks gave investors a powerful rally in March, exactly as the rest of the market was falling apart. That alone was worth a hefty value to bulls who were seeing carnage in the rest of their portfolio.
However, the trend in telehealth is not a one-year phenomenon. It’s not something that’s only benefiting because of Covid-19 and it won’t go away once we’re vaccinated. Like many other trends, it’s something that will remain in place for years to come.
Let’s look at three reasons why TDOC stock is a buy.
Growing Industry
The pandemic accelerated the use of telehealth services, mostly out of necessity. Why expose yourself — from the patient and doctor’s perspective — if we don’t need to? From the Centers for Disease Control and Prevention:
Telehealth could have multiple benefits during the pandemic by expanding access to care, reducing disease exposure for staff and patients, preserving scarce supplies of personal protective equipment, and reducing patient demand on facilities. Telehealth policy changes might continue to support increased care access during and after the pandemic.
The pandemic accelerated many trends that were already in place. Some investors are mistakenly thinking that these trends will reverse when Covid-19 does. That’s not going to be the case. At least, the situation isn’t that black and white.
What goes up doesn’t have to come down. While these industries won’t replicate the growth rates we saw in 2020, it doesn’t mean they will reverse back to pre-coronavirus levels.
Streaming video, video conferencing, electronic document management and telehealth are all enjoying long-term secular growth. They were before the pandemic and they will after it’s over.
Why? Simply because these industries are more efficient, more convenient and less expensive. To undo that growth implies customers will opt for less efficiency, more inconvenience and more expensive options. That’s simply not going to happen.
Teladoc Has Growth
When we look at the specific growth for Teladoc, investors shouldn’t come away disappointed.
After its merger with Livongo, the combined entity has plenty of different growth levers to help drive its results. First, Teladoc has its Get Care Now unit, which offers general medical advice for non-emergency care.
The company also offers mental health, wellness care, dermatology, and specialist and expert advice. It’s not some hodgepodge mixture of random services with randomly selected staff members. This is a well-organized fusion of medical technology with board-certified and licensed doctors and medical personnel.
Analysts expect more than 31% revenue growth this year and almost 26% growth in the following year. I would like to see that second year of growth edge above 30% too. However, after the recent pullback, the valuation isn’t all that bad.
Fifteen times this year’s revenue estimate isn’t cheap necessarily, but 11x one-year forward expectations doesn’t have me sweating Teladoc too much. I know it’s not necessarily cheap versus your typical company. But in tech, it’s not that rich, particularly for its growth.
Consider that in 2019, the company had about $550 million in annual revenue. If the above estimates are even close to accurate, it will generate over $3 billion in sales two years from now. While that’s after a merger, we’re talking about some serious growth.
TDOC Stock Is on Sale
I just mentioned the stock’s recent pullback, which is a major point worth emphasizing. Less than a month ago, TDOC stock was clearing $300. Now shares are consolidating around $200.
The haircut has been quick and painful for those already long. From peak to trough, shares are down 43.5% and at current prices, the stock is down around 37%.
As painful as it can be, I love these types of declines. The move took less than three weeks to complete, but it’s giving bulls a great opportunity. Those that have read my pieces for long enough, may recall that I like the 40% rule. That is, a 40% decline in leading growth stocks usually gets my attention.
Sometimes that decline is only for 30%. Sometimes it can be 50%. Either way though, high-quality assets rarely shed 40% of their value and maintain those losses (or more) for very long.
Again, anything is possible. But if investors have been stalking TDOC stock and like the business, a 40% three-week sell-off is as good of time as any to start shopping.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
