The telehealth market is one of the most glaring in terms of growth potential that surfaced during the recent pandemic. It is coming in from a low base initially and with Covid 19 in full force, it has triggered the adoption in huge strides. The regulatory issues were also quickly expedited for a smooth transition as quarantine became a norm for many.
| Details | |
| The market size value in 2021 | USD 72.7 Billion |
| The revenue forecast in 2028 | USD 298.9 Billion |
| Growth Rate | CAGR of 22.4% from 2021 to 2028 |
Source: www.grandviewresearch.com
From the estimates by Grandview Research, the total market potential could reach 300 billion dollars in 2028, which gives us a compounded return of 22.4%– it is a good run-way of consistent and viable growth. That is just the North American region.
These estimates are also backed by Mckinsey forecast for a 250 billion dollars telehealth market- a 20% share of the total medical market.
Strong continued uptake, favourable consumer perception, and tangible investment into this space are all contributing to the continued growth of telehealth in 2021. New analysis indicates telehealth use has increased 38X from the pre-COVID-19 baseline.
Source: Mckinsey
What is Telehealth?
Given the strong industry outlook, let’s first try to grasp the concept of telehealth.
There is always confusion between telemedicine and telehealth where the latter covers a broader perspective that goes beyond just clinical services. In basic terms, it covers everything from seeing a doctor through Zoom to training doctors on the use of new medical equipment.
This will be a good definition extracted from the Health Resources Services Administration website.
The Health Resources Services Administration defines telehealth as the use of electronic information and telecommunications technologies to support long-distance clinical health care, patient and professional health-related education, public health and health administration. Technologies include videoconferencing, the internet, store-and-forward imaging, streaming media, and terrestrial and wireless communications.
Telehealth is different from telemedicine because it refers to a broader scope of remote healthcare services than telemedicine. While telemedicine refers specifically to remote clinical services, telehealth can refer to remote non-clinical services, such as provider training, administrative meetings, and continuing medical education, in addition to clinical services.
Source: HealthIT.gov
These are some of the advantages of moving towards a virtual medical care platform:
- Lower Costs
- Minimal Waiting Time
- Suitable for Patients with Chronic Conditions
- Suitable for Psychiatry and Mental Health Conditions
Introducing Teladoc
With the good industry metrics and growth ahead, Teladoc which is at the forefront of this evolution from face to face to virtual medicare services would be an interesting investment proposition that we will be looking at through this post.
Teladoc has been around since 2002 and it was only listed in 2015. It is one of the biggest players in the telehealth sector. It has a 13% market share (main competitors are having less than 5%) in the US, where their business is primarily from- overseas revenue only accounts for 12%.
Source: Teladoc Investor Presentation
The company have been on an acquisition mode to build up their network and as you could see they have managed to create a gigantic ecosystem that could create the network effect to turn in the profits. Their latest acquisition was Livongo where they have a merger and share swap which valued the deal at close to 14 billion dollars. Livongo is in the chronic disease field, primarily diabetes but they are expanding their scope. These are diseases that would need regular care and hence recurring income for Teladoc.
Source: Teladoc Q3 2021 Results
The business model of Teladoc would be of a subscription model where Access fees make up 86% of their revenue. Visit Fees only makes up 11%. It is our thinking that access fees would be paid yearly- membership mode- and likely by employers. Visit fees are charged on a per-visit basis and likely by individuals.
Financial Metrics
| Symbol/ Stock Price | Market Cap | Price to Book | Net Debt to Equity | Price-Earnings | Price Sales | Dividend Yield |
| TDOC/ 136 | 21 Billion | 1.37 | 0.08 | NA | 11 | Nil |
Source: Morningstar
Looking at the financial metrics, we could only say it would not excite one much as it is still making a loss. However, as with all growth stocks, earnings would not be the main criteria.
Nonetheless, they are in a great financial position with net debt to equity of just 0.08 so would not face any liquidity issues in the next couple of years.
Price to Book of 1.37 also looks attractive for a growth stock but 16 billion of book value is backed by goodwill and intangible assets (Could be easily written down)- on paper, not physical assets.
Source: Teladoc Annual Report 2020
Looking at their revenue from 2016 to 2020, we are seeing an astonishing 72% compounded annual growth that could be due to their numerous acquisition through the years. However, bringing your attention to their losses, their losses have not gradually decreased.Â
There was a huge jump in the loss for 2020 which could be attributed to the surge in general and administrative expenses. We hope this would be due to the merger and acquisition expenses of Intouch Health and Livongo- hence just a one-off charge and non-recurring.
Source: Teladoc Q3 2021 Results
For growth stocks, we are fine with losses but we hope to see there is positive operating cash flow. This shows that the business model is viable. Teladoc seems to be able to fulfil this criterion for 9 months to date with a positive operating cash flow of 110 million and the corresponding period in 2020 with a 61 million positive cash flow.Â
But looking deeper, we could see the cash flow for 2021 was supported by deferred income taxes and also stock-based compensation (saw a huge jump that could be caused by the Livongo merger)- was added back as they are considered non-cash charges. Stock-based compensation would lead to dilution for existing shareholders as more shares will be outstanding.
From the profit and loss statement earlier, we have seen the outstanding shares growing from 42 million in 2016 to 90 million in 2020. As of today, the outstanding shares are at the 160 million mark. We could see that the offering of new shares is the usual preferred mode for their acquisition. This is perfectly fine if they can have a path to profitability but the path still seems elusive at this juncture.
Source: Macrotrends.net
Chartist Point of View
Source: Investing.com chart of Teladoc as of 15th Nov 21
The chart looks to be entering into a consolidation stage between 125-150 regions. It has fallen more than 50% from its peak of 300. However, there is no clear direction at the moment till they broke through their current consolidation range of 125-150.
Summing Up
The telehealth industry is indeed on a growth trajectory since the Covid19 catalyst that has pivoted attention to this essential sector. The expected growth would be in the 20s till 2028 that could see this market reaching 250-300 billion dollars.Â
One of the beneficiaries would be Teladoc which has a commanding market share of this sector. It is also on a huge acquisition mode to build up its vast ecosystem that could lead to a network effect. As Jeff Bezos once said, “Build it and worry about the profits later.”Â
Will their network effect leads to better profitability?
It is anyone’s guess now as execution is key. There are some worrying metrics namely their huge rise in shares outstanding for acquisition and stock-based compensation. It did not lead to better financial results as their losses are still not improving.Â
We need to see more credible positive operating cash flow through a huge reduction in their stock-based compensation that has skyrocketed after the Livongo merger- hoping it is not a recurring big figure.Â
Ultimately, we hope to see the synergies from their recent big acquisitions of Livongo and Intouch Health surface in their bottom line- actual profits. They need to start working on their business model by growing their revenue organically rather than just through acquisitions and share issuance.Â
They have the optionality to make things work as they are in a good financial standing with no short to medium term liquidity issues. If it helps, Cathy Wood from Ark Investment has a substantial stake of Teladoc in her funds, which she has been buying during the recent dips.
Till we see improvements in the areas highlighted, we would likely stay on the sidelines for Teladoc which holds great promise given the bright outlook of their sector.
Disclaimer:
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