Teladoc Health stock: On Turnaround Course with New CEO?

An investment idea only for hardened anti-cyclical investors

Over the past two and a half years, many of the second-tier tech stocks that were popular with retail investors through 2021 have gone in only one direction - they have continued to tumble, wiping out their shareholders' capital in the process.

The top management of a number of these companies has changed over the past 12 months. These companies are struggling to overcome more or less significant underlying problems and are transforming. Very few investors are willing to invest in these stocks.

It seems to me that the valuation of some of these companies is now in an exaggerated downward phase after the deep fall. In other words, I see great potential in the medium to long term to make an anti-cyclical investment now by carefully selecting these "fallen angels".

I am already invested in two such companies: PayPal PYPL 0.00%↑ and Vimeo VMEO 0.00%↑ , both of which have had new CEOs in the last 12 months.

Today, I would like to draw your attention to another fallen angel, Teladoc Health TDOC 0.00%↑ , which could become interesting again after a change in management. Those of you who have been following me for a while may already be familiar with the virtual healthcare company.

Teladoc Health Stock price development

In 2020, following the outbreak of the coronavirus pandemic, I warned against the coronavirus highflyer here on my German blog due to its overvaluation. At the time, Teladoc was valued at 13 billion USD with revenues of just over 500 million USD (2019). During the tech hype, the company was even trading at up to 40 times sales.

At the time, the company "only" operated a telemedicine platform that had also grown through acquisitions, offering 24/7 access to doctors on demand via smartphone and the internet via video and telephone. After a series of smaller acquisitions, the 18 billion USD merger with Livongo, which at the time was very successful in establishing digital support for diabetes patients, followed in 2020.

The plan for the merger at the time was to create a market-leading digital health company. Based on the high share prices of both companies, the value of the company was 44 billion USD, which is completely unrealistic from today's perspective.

Then the tech bubble burst and the merged company now trades at an enterprise value of just 2 billion USD, after an unprecedented 97% drop in share price. This is despite the fact that Teladoc Health's revenues have multiplied to 2.6 billion USD over the past 4 years and the company is now free cash flow positive.

What is driving Teladoc's low valuation?

Obviously, the financial market has doubts about the business model and the long-term viability of the company. There is no other explanation for the fact that the market value has now fallen well below the book value. Indeed, the company has failed to make a profit in all these years under the previous management.

In recent years, this has mainly been due to high amortisation of intangible assets. In 2022, a record 13 billion USD of goodwill from the overpriced acquisition of Livongo had to be written off. Although Teladoc's net loss was reduced to 200 million USD in 2023, there is still no sign of the company returning to profitability in 2024.

After another disappointing Q1 2024, long-time CEO Jason Gorevic was (finally) forced to leave the company with immediate effect in April 2024. He is replaced by Chuck Divita, who is stepping into a CEO role for the first time after a long career in the health care industry.

He inherits a mountain of challenges from his predecessor, but can build a new strategy on a massive customer and user base and a strong market position.

Today, Teladoc has two business units, each with revenues of more than 1 billion USD:

• The B2B Integrated Care segment serves 92 million members with Teladoc programmes funded by over 1,000 employers and more than 100 health plans. More than 1 million patients are managing their chronic conditions with the help of Teladoc.

• In the direct-to-consumer (DTC) Better Help segment, more than 400,000 paying consumers generate more than 1 billion USD in subscription fees. A wide range of therapies and coaching services are offered exclusively to self-pay customers.

With such a huge customer base, a digital business model and high gross margins of around 60%, it should be possible to make a lot of money. At least that's what you would think from the outside.

I am very curious to see what the new management will do with this. The new CEO has valuable experience as a CFO in the healthcare sector. He will be much more cost-conscious than his predecessor, for whom revenue growth was always the top priority.

Valuation of Teladoc Shares

Despite revenues of 2.6 billion USD, Teladoc now has an enterprise value of just over 2 billion USD at a share price of 9.50 USD. An EV/Sales ratio of less than 1 is astonishing for a leader in the digital health market.

Valuation of the Teladoc Health share

Furthermore, this valuation is only 6 times the free cash flow reported over the last 12 months.

Conclusion

Teladoc Health has not been well managed in the past. The company grew too fast and too wildly through too many overpriced acquisitions. It will now be up to the new management team to turn the ship around. A top manager with turnaround skills is now needed at the helm to bring structure to the acquired company and make it profitable.

It is a bit early for me to get involved at this stage. I would like to learn more about the strategy of the new CEO, Chuck Divita, and see the first results.

I will be watching Teledoc's next few months and quarters with great interest. With the right management team, I see a lot of potential here in the medium term. Always assuming that the market for tech stocks, which is currently dominated by the AI theme, turns around and investors realize that the future of a company does not only depend on how often the term AI is used in the respective earnings calls ;-)

Since the change of CEO, Teladoc Health is now at the top of my watchlist. There are a couple of other interesting fallen angels on my radar that are currently undergoing a turnaround with a new CEO. In the coming weeks, I will be highlighting one or two more stocks from this category here on the substack.

If you are interested in such anti-cyclical investment ideas, you can

*Disclaimer

The author and/or related persons or entities do NOT currently own shares in Teladoc Health, but may do so in the future. This article is an expression of opinion and does not constitute any investment or financial advice.