Description

Teladoc is the largest, and only true scaled telehealth provider, with over 92m US members in its core B2B telehealth network and over 400k paying users for its B2C mental health BetterHelp business. A history of terribly expensive acquisitions, mainly Livongo ($18.5bn), unbridled expense growth under unrealistic long-term growth expectations, a Covid induced mania for anything remote/healthcare related (and Cathy Wood cheerleading), a maturing and saturated core domestic virtual care business, tough competition and low ROAS in BetterHelp on the B2C side, and the recent firing of long-term CEO and appointment of a new CEO followed by a  quarter that included pulled 2024 guidance have brought the stock from a peak of $300 in early 2021 to ~$7 today. An incineration of over $45Bn of market cap over that time period.

Despite all that I believe TDOC will be one of the few survivors in the telehealth space given its scale and profitability (positive cash flow) that should enable it to continue offering ancillary products that make it a one-stop shop for health insurers and employers that currently need to onboard too many individual point solutions. TDOC was posted twice on VIC as a short in 2015 and 2017, and while the outcome was correct, many parts of the short thesis ended up not being correct, with TDOC continuing to grow and actually becoming profitable in both the Integrated Care and BetterHelp businesses. Nevertheless, with the stock at ~$7 today, I believe the short thesis has largely played itself out and we are near the trough, with the risk-reward now skewed quite positively with several potential catalysts that could drive the stock materially higher over the coming years. TDOC's valuation has made a round trip from massively overvalued with the market pricing in unrealistic future growth to now significantly undervalued with the market pricing the business as a melting ice cube with no strategic value.

Downside is protected given TDOC today is only a ~$1.75bn EV with ~1x of very cheap out of the money convertible net debt (net interest spread is positive), generating positive free cash flow (15% yield on 2025E), trading at a ~4.8x 2025 Ebitda multiple ( ~6.0x inc normalized stock comp), with a large installed base of recurring revenue, long-term growth tailwinds in the mental health business, a business model that lends itself to ~70% gross margins, and a massively bloated cost structure with plenty of SG&A to be slashed to maintain profitability if the business happens to melt. If BetterHelp got competed away and/or couldnt generate a profit long-term despite its scale, the Integrated Care business is likely worth more than the entire company is valued at today.

There is potentially significant upside under an M&A scenario (PE or strategic), a successful and more rapid transition to a B2B model for BetterHelp, a real operating focus from the income CEO on cost structure alignment to a MSD growth business, and if all else fails, an activist that forces any one of the above scenarios. Even assuming no major strategic changes and operating as-is with slight growth and some opex discpline should yield at least a 2x from here over the next two years. And in a bull case the stock could be worth ~$40 (~5x). Even getting back to 2023 prices, which should only require some of the short-term headwinds to abate, would yield ~3x upside, and I see no real structural developments that would prevent that.

Given the last time TDOC was written up was in 2017,  I will go through a high level overview of each of TDOC's businesses to frame the setup. Note that historically, the company has provided awful KPI's that it changes almost annually to try and obfuscate any real analysis of what is going on in each of the main businesses within the two segments. The new CEO has a real opportunity on this front to put out KPI's that actually make sense. Given that, the analysis below is full of estimates that I think are directionally accurate but welcome any corrections.

Integrated Care Segment Economic Model (55% of revenue, 60% of EBITDA, 14-15% EBITDA margin):

Integrated Care is comprised of three underlying businesses, US virtual care or telemedicine, chronic care, and international.

US virtual care is Teladoc's historical core business accounting for ~40% of IC revenue. TDOC provides patients, mostly through insurance plans, access to a virtual doctor for non-life threatening sicknesses or ailments. TDOC is the undisputed market leader with over 92m US members. This is a B2B business where TDOC contracts with the large health insurance carriers and large employers who then provide access to TDOC's platform to their employees. There are two primary revenue sources - access fees and visit fees. Access fees are effectively subscription revenue whereby members pay a monthly fee (per member per month, or PMPM) for access to Teladoc's physicians. I estimate ~60m of the ~90m domestic members in 2023 paid via access fees at ~$0.45 per month, a trivial amount relative to total insurance cost. The remaining ~30m members have visit-only plans where insurance will pay ~$80-90 per visit. Over the years the plans have become more hybrid with even some of the access fee plans having a visit component and more recently some outcome based revenue.

The value proposition to insurers is that the $5-6 annual access fee even at just 10% utilization ($50-60 for 9 people) is cheaper than the cost of a primary care or urgent care visit for that 1 person that foregoes the traditional route to use telemedicine. The bear thesis is that there is no value given telemedicine is a complementary rather than replacement service and/or start-ups, insurers, or Amazon will attack the market at a cheaper price. At the current valuation I think the bear thesis is more than priced in and I believe this will be a core component in health plans for years to come. Walmart recently announced their exit from telemedicine given the economics. If you are not a scaled player you cant compete with TDOC. The end of free money for unprofitable startups has ensured that.

Unit economics in this business approximate a 55-60% gross margin, lower than the company average as this core customer base acts as a springboard for ancillary upsell opportunities from chronic care and other products. Given access fees (2/3 of the business) are mostly a fixed revenue source with a variable COGS structure, higher utilization in this cohort could bring margins lower. Despite this, company-wide gross margins have remained quite stable over time, indicating some level of incremental compensation at higher utilization levels. Utilization is roughly 10-15% yielding 10-12m visits on the installed base (TDOC noted 22m visits in 2023 across the business including BetterHelp). TDOC pays physicians $23.50 for a telephone call and $28.00 for a video call, approximating ~$25 of COGS for every visit. 

Revenue growth in core US virtual care will primarily come from share gains, higher enrollement in existing plans, and higher visit ARPU, partially offset by potential pricing pressure on access fees. This business will likely not grow more than LSD for the foreseeable future. However, as noted above, it provides a large cross-selling breeding ground for higher value TDOC products. And despite a saturated market, TDOC has continued to grow members at a ~7.5% CAGR over the last 2.5 years. 

Chronic care is primarily the historical Livongo business the company paid $18.5bn for during the peak Covid mania. It accounted for ~42% of 2023 Integrated Care revenue. TDOC provides monitoring services for at-risk patients with chronic illnesses such as diabetes, high blood pressure, weight loss management etc. The goal is to front-run more expensive health care costs down the road if those health concerns become major issues. This is the key cross-sell for the core virtual care member base and is still very underpenetrated with only 16% of members having access to chronic care products and just ~1% penetration on the 92m customer base. As of 2Q24, the enrollment for chronic care was 1.17m. A large portion of that enrollment consist of users that have more than one product. Chronic care enrollment has been growing at a ~12% CAGR for the last 2.5 years, growing ~9% in the recent quarter, and returning to sequential growth after a 1Q24 that saw sequential decline. GLP-1 drugs have negatively impacted growth recently and TDOC has shifted its offering by helping those users keep the pounds off. 

Chronic care access fees are much higher than the core virtual care and contribute to offsetting the decline in ARPU for the segment overall. The average monthly ARPU is ~$50, with management noting that diabetes is ~$65 and bundles of multiple products can get to ~$100 per month. I estimate this is a high gross margin business of 80%+ supported by Livongo's stand-alone historical ~70%+ margins. The bear case for chronic care is that it is not value-add to the insurer. A well publicized study in March 2024 noted that diabetes care apps dont show a meaningful benefit. I dont have any unique insight here except that I think the TAM is still large enough and the products make enough sense (people more apt to be healthy if held accountable) that there is likely many years of growth ahead here. The company, fwiw, welcomes the introduction of more value-based economic plans - TBD if that will be actually economic for TDOC.

The remaining 18% of Integrated Care is the International business, mostly virtual care but also some chronic care. International and chronic care are expected to grow M-HSD over the forecasteable period while US virtual Care will be a LSD grower - equating to a MSD top line growth business for Integrated Care.

The Integrated Care business is a decent business and likely worth in excess of the entire company today (~225m of EBITDA at 10x = $2.25bn vs $1.75bn EV) and its value is being masked by the tougher B2C BetterHelp business. In the base case outlined later I see 2026 EBITDA of ~$275m which assumes just 2% US virtual care growth and 6% chronic care +international growth with 100bps of annual margin expansion, which implies modest ~38-40% incremental margins. With ~$850m of OpEx annually in this business there should be plenty of opportunity to cut even more costs than what has been previously announced. New CEO Chuck Divita implied on the recent 2Q call that he will be taking a harder look at TDOC's overall OpEx structure. He is a former CFO so should be more financially literate than former former CEO Jason Gorevic who only recently saw the rationale to operating profitably. It is hard to see how TDOC's B2B Integrated Care business needs $800m+ of OpEx and this should be a high incremental margin business with minimal OpEx growth (or declines) as revenue grows in a mature market.

BetterHelp Segment Economic Model (45% of revenue, 40% of EBITDA, 10-12% EBITDA margins):

BetterHelp is the leading virtual mental care platform. Users pay a monthly subcription fee of $200-300 and that permits them 1 visit per week to a therapist (ARPU =~$217 in 2Q24). This is an out of pocket expense paid by the ~400k paying users and is not yet covered by insurance directly. It is a B2C model that requires significant advertising spend to continually attract new users. Assuming utilization is ~50%, so 2 visits per month for people paying on average ~$217, offset by COGS of $30 per session for 30-45 minutes to the therapist, gets you to 65-70% gross margins in the business. This is higher than BetterHelp's primary competitor TALK.

Mental health is one of the biggest untreated health issues today and the ability to provide care should be a structural growth tail-wind for many years - amongst all age groups, from teens to adults, military veterans, etc. However, this business has caused most of the consternation amongst public investors in the last 2+ years given increased competition and higher CaC, some of which is transitory (election advertising) and some of which isnt. More recently, guidance for 2024 was pulled because of increased CaC and the new CEO's decision to take a deep dive into the business. While the market is embedding lower revenue and EBITDA, there is a scenario where EBITDA margins go higher in 2024 despite lower revenue growth. I believe the CEO likely wanted to pull guidance, implemented prior to his arrival, to ensure the bar was set low from here.

The scale and growth of this business is under appreciated, with revenue growing from $345m in 2020 to >$1bn in 2024 (assuming -10% YoY). Despite spending $550-600m of external advertising annually, it is EBITDA profitable and serves a real need at a lower price than in-person sessions. It is undeserving of an implied ~5-6x EBITDA multiple, but that is the market telling TDOC management it needs to transition the business model to stay relevant.

Talkspace is the key competitor making in-roads into BetterHelp's market share. However, it is still only 1/5th the size of BetterHelp. This is BetterHelp's market to win but it needs to rapidly transition to a payor B2B model as the market is moving towards insurance coverage and TALK has the upper hand here, having started transitioning ~2.5 years ago. A transition to a B2B model will materially reduce sales and marketing expenses and create a lower churn, higher multiple recurring revenue stream. TDOC management has mentioned starting to explore the B2B model - but they need to mover with urgency while they have the scale to be the natural winner in this market given their 90m+ core virtual care members and the amount of ad spend historically building the BetterHelp brand. 

Since transitioning to a B2B model, TALK has reduced its sales and marketing expenses by ~50% from 2021 to 2024 while growing revenue. Sales and marketing is now only ~25% of revenue with B2B revenue ~2/3 of that. That compares to BetterHelp external advertising expense (not even including marketing) at close to ~50% of revenue. The holy grail is for BetterHelp to start transitioning to a B2B model, capturing incremental payor model users, while keeping the B2C base flattish, cutting costs and using those costs to reinvest in the platform capability to serve the insurance and direct to enterprise market (ie school systems, corporations, government). Whatever it costs to do this will be worthwhile as it will make this business relevant long-term which should result in both earnings growth and multiple appreciation. TALK trades for double digit EBITDA. In my basecase I assume a slower transition to B2B that results in net negative revenue growth but improving SG&A as a % of sales which should yield $125-130m of EBITDA at a higher multiple in 2026. Similar to Integrated Care, BetterHelp is likely worth almost the entire enterprise value of TDOC today to a strategic and/or if they can execute a successful transition to B2B.

Valuation Scenarios:

• Base Case = $21 @ 12x
  • 2% US virtual care growth, 6% chronic care + international = 4.5% IC CAGR. Margin expansion of +100bps per year and $276m of EBITDA in 2026.
  • BetterHelp revenue growth of -10%, -5%, -5% from 2024-26 as the transition to B2B takes away focus on the D2C business. SG&A tails down to 56% of revenue yielding ~$130m of EBITDA, lower than 2023.
  • Multiple of 10x - lower than subscale peers (albeit growing slower) and an implied ~6-7% unlevered FCF yield.
• Bull Case = $39
  • 3% US virtual care growth, 8% chronic +intl. Cost cutting commitment yields +150bps annual margin expansion in IC and >$300m of EBITDA.
  • 5% growth in BetterHelp in 2025/26 after -10% in 2024. Cut advertising spend by 25% (versus the 50% at TALK), yields 30% BetterHelp margins and $337m of EBITDA 
  • Multiple of 12x and a 6% unlevered FCF yield. 
• Bear CAse = $12
  • -2% US virtual care CAGR, 3% chronic + intl, flat IC margins (ie competition picks up, share gains and/or pricing erodes, and CEO doesnt execute cost cuts)
  • -10% CAGR in BetterHelp, margins flat with 2024 at just 10% (lowest in last 5 years)
  • Multiple of 8x implying a 7% FCF yield with just 0.5x leverage
  • Even at a 6x multiple the stock would be ~$8-9, higher than today

 Catalysts:

• Clarity around the CEO's strategic plan and willingness to make the tough decision to cut significant costs in both Integrated Care and BetterHelp. Plus a firm public commitment to a transition to a B2B model at BetterHelp. 
• Clarity around 2024/25 profitability in BetterHelp given guidance was pulled in 2Q24. Market is looking for surety the business wont fall off a cliff.
• Activist involvement - This has all the hallmarks of what should attract an activist including the ability to force a transition to B2B in BetterHelp and cut costs to both expand margins and fund investment needed for B2B BetterHelp platform.
• Strategic or PE Take-Out - Strategics including Amazon, VC backed platforms, and insurance backed platforms should find TDOC's scale, underlevered balance sheet, and cash flow to be quite attractive at current valuation. Private equity at a $10 purchase price could see close to a 5x MOIC over 3 years with modest 4x leverage implying ~$1bn equity check. This would be more than palatable for a large PE firm and the ability to cut costs may be more optimal privately. However, I would be disappointed in a take-out at $10 and believe there is significant public market value that can be created.
• Modest execution and cash flow generation
• Useful KPI's and disclosures

Other Considerations:

• NOLS of $2.4bn FEderal and $1.35bn State - very valuable to TDOC as it continues to generate positive profitability and cash flow. TDOC shouldnt be a taxpayer for a long-time.
• Stock comp - This has been elevated at $200m+ annually. However, a large part of that is due to grants issued at higher prices. Annual RSU/PSU's granted were ~9m in 2023. I assume that is more normalized at $7-10 at grant = $63-90m. Still very high and should be much lower given the growth profile of the business. 

Catalyst

• Clarity around the CEO's strategic plan and willingness to make the tough decision to cut significant costs in both Integrated Care and BetterHelp. Plus a firm public commitment to a transition to a B2B model at BetterHelp. 
• Clarity around 2024/25 profitability in BetterHelp given guidance was pulled in 2Q24. Market is looking for surety the business wont fall off a cliff.
• Activist involvement - This has all the hallmarks of what should attract an activist including the ability to force a transition to B2B in BetterHelp and cut costs to both expand margins and fund investment needed for B2B BetterHelp platform.
• Strategic or PE Take-Out - Strategics including Amazon, VC backed platforms, and insurance backed platforms should find TDOC's scale, underlevered balance sheet, and cash flow to be quite attractive at current valuation. Private equity at a $10 purchase price could see close to a 5x MOIC over 3 years with modest 4x leverage implying ~$1bn equity check. This would be more than palatable for a large PE firm and the ability to cut costs may be more optimal privately. However, I would be disappointed in a take-out at $10 and believe there is significant public market value that can be created.
• Modest execution and cash flow generation
• Useful KPI's and disclosures