TDOC Should Remain The Leader in Virtual Healthcare

  • Teladoc is a virtual healthcare company, whose merger with Livongo is creating an all-in-one digital health solution.
  • With healthcare being an enormous and inefficient industry, Teladoc has an opportunity for disruption.
  • Given the company’s projected growth rate over the coming years, the current valuation on Teladoc is attractive for long-term investors.

Teladoc Health, Inc. (NYSE:TDOC) has been steadily building since it was founded in the early 2000s. Through innovation and M&A, the company has assembled a portfolio of products and services that give Teladoc an opportunity to disrupt the enormous global healthcare market. The market’s negative sentiment since the Livongo merger is offering investors an attractive valuation to acquire what could be a titan of industry down the road. We will detail the opportunity, company, and valuation below.

Teladoc Health is a virtual healthcare company that provides virtual/telehealth services to patients across the world. The company was founded back in 2002 as Teladoc, Inc. and is generally hailed as the first of its kind in the United States and the largest player in the space today. The company has services in roughly 130 countries and serves more than 50 million people.

Teladoc’s business model has been slowly built over nearly two decades, long before the company’s IPO in 2015. And while the company has been public for years, the real strength of the business model hasn’t necessarily peaked until recently following the company’s $18.5 billion merger with Livongo to create the entity that it is today.

Teladoc and where its business is trying to go is a misunderstood model by many investors and the market as a whole. We are going to break down what Teladoc is trying to accomplish by unwrapping what “whole-person healthcare” means at a high level.

The concept of “telehealth” in and of itself isn’t a groundbreaking concept. The idea of telehealth goes back to the 1950s and 1960s when clinical psychology was done over the phone. Teladoc has expanded on this concept, building a network for virtual healthcare services at a large scale. This process has taken years of acquisitions and partnerships, but the end result is a leading virtual healthcare business with a large distribution network of providers, and access points across the world.

At its core, telehealth is about digitally connecting patients with the healthcare solutions that they need. This is what has been talked about in the face of Covid, where virtual healthcare has surged in 2020. But this is where the misconception arises for investors. Because by itself, telehealth isn’t necessarily too “moaty” of a business model. Scale is your largest advantage, and while Teladoc is a huge player, it still faces competition from multiple players.

However, the company’s merger with Livongo changes everything. Think about how we arrived where we are right now with cloud and big data. The internet started as primitive technology and spent decades establishing infrastructure and basic capabilities, before innovation in recent years has opened up a new frontier of what we are capable of doing with this infrastructure. In other words, the infrastructure of the internet connected the world – but we have since evolved into advances in data, analytics, artificial intelligence, and more. We are using these new levels of technology to do new things, and things at a higher level than we ever thought possible.

When I look at telehealth, I see a similar trajectory. With telehealth becoming increasingly available to patients, I see the current state of the industry as being in a phase where this infrastructure is just hitting its stride. This increase in connectivity has been useful during the Covid pandemic. We are seeing a digital transformation of the existing healthcare industry. Some expect that this digital migration is only a temporary thing, and it may very well recede some once Covid passes. However, the opportunity in Teladoc is not just about the digital transformation of existing healthcare, but the emergence of a new means of providing healthcare altogether.

Let’s talk about Livongo for a minute, and then tie it all together with what Teladoc is trying to do. Livongo is best thought of as a “smart” healthcare company. The company uses cloud, connectivity, and artificial intelligence to provide smart and personalized healthcare to those with chronic conditions such as diabetes.

For patients, Livongo provides:

  • Connected devices that can track health metrics from a patient’s home.
  • Personalized data to give patients real-time feedback from meetings with care providers.
  • Health coaching to help patients stay on track and increase effectiveness of care plans.
  • Reports for doctors, so that care providers can be consistently up to date on your status and progress.
  • Custom alerts for patients.

These features give patients treatment that is more convenient, personalized, up to date, and accurate. Livongo offers care for a number of chronic conditions such as Diabetes Management, Diabetes Prevention, High Blood Pressure, Behavioral Health, and Weight Management.

In providing a more personalized and data driven approach to healthcare, Livongo patients are seeing measurable progress in improving their chronic conditions.

It cannot be emphasized enough how important the Livongo acquisition was for Teladoc. If they had remained two separate companies, I would be writing about Livongo right now – it’s Livongo that makes Teladoc a potentially special business moving forward.

With the addition of Livongo’s technologies to Teladoc’s existing telehealth infrastructure, Teladoc is creating an all-inclusive virtual healthcare model. To illustrate, let’s discuss how a typical doctor’s office visit goes.

Let’s say you go to the doctor to discuss your high blood pressure. You go to your doctor’s office. You need to hop on a scale, do your vitals, and get your blood pressure checked. After sitting around for a while, the doctor comes in to look at the nurse’s readings. He does some note taking while discussing with you, the need for you to (likely by losing weight) lower your blood pressure. He may prescribe some medication. His advice is probably something along the lines of “eat a healthy diet and exercise, and I will see you in 3-6 months”.

This general summary has been “the way it goes” for many decades. However, there are numerous inefficiencies throughout this visit and how it took place. Your vitals were taken once, which is a very small sample size. There could easily be variance involved. As a result, the doctor is making decisions based on a limited (and potentially flawed) sampling of data.

Outside of your doctor’s visit, the onus is on YOU to watch what you eat, your portion size, etc. The treatment falls into the hands of someone who has clearly already failed to keep these things in check. So, what happens with most people? Bad habits win out, and patients wait until the three-month follow-up to be lectured again by the doctor. There is very little progress over the long term.

The combined entity of Teladoc and Livongo can address and improve many of these inefficiencies. Imagine having a device where all you had to do was take a daily reading, and your doctor could instantly pull up reports that showed trends of how your blood pressure was reading over an extended period of time? A doctor would be more informed to make decisions.

What if there was coaching, notifications, and real time support available to keep you on the right track with your behavior at home? The presence of a guiding hand would make it much easier to make positive changes and stick to them.

When healthcare is more personalized, it’s more effective. And while Livongo’s technologies are currently centered in chronic conditions, the runway for personalizing healthcare is there for more serious health ailments, and also for underserved niches of care such as mental health. The merger of Livongo and Teladoc marries this personalized version of healthcare with the scaled telehealth infrastructure of Teladoc. It’s the type of match that makes a widespread, “all-inclusive” digital approach to healthcare viable.

Investors looking at Teladoc today might see patients hopping on video calls with doctors, and shrug. “Oh, that will end once Covid passes over”. But this is missing the long-term picture IMO. Healthcare is moving in a direction that is smarter, data driven, and personalized. Teladoc refers to this as Whole-Person Health.

Insurance Companies Will Help Scale Teladoc

Such a systemic change to the way healthcare is conducted would have no shot of coming to pass without change being driven through the health insurance companies. This is true in the US more than any other country in the world.

Even though this technology is better for patients, change will ultimately be a matter of economics. Fortunately, a digital and personalized approach to healthcare will benefit insurance companies by removing substantial cost out of the current healthcare system. We see this evidence in a number of places. A study showed that a telehealth program lowered monthly costs for cardiovascular patients by $576 compared to in-person care.

Another study in Houston showed that a telehealth program reduced unnecessary emergency room visits, translating to $2,468 in savings for the healthcare system with each avoided unnecessary visit.

And finally, Livongo’s own research has shown that health insurance companies save an average of $83 per diabetes patient per month. Imagine a company with 10,000 employees on a health insurance plan. That insurance company is going to save roughly $83,000 per month via Livongo (using diabetes prevalence rate of 10%).

With virtual services providing a cost savings to insurance companies, incentives are being offered to employers to get employees using virtual care. Now more than 40% of Fortune 500 corporations are using Teladoc Health. This is accelerating the adoption rate of virtual healthcare services. While Covid has shined a spotlight on virtual care, the reality is that Covid has only accelerated this transition – however the transition itself was happening before Covid.

Teladoc Is Poised For Strong Growth Moving Forward

Teladoc is poised to grow rapidly in the years ahead. This growth will be driven by two main components. The first being a “big picture” shift towards telehealth, and the second being unlocked growth following the merger with Livongo.

You see, the shift towards telehealth was already happening prior to Covid. A research report was published just as the Covid outbreak was beginning that forecasted a 15% CAGR for the telehealth industry through 2027. The report was based on data from 2016 to 2018 and used 2019 as its base year for forecasting. Why was telehealth growing prior to Covid?

Well, there are clear cost savings in a telehealth system as we just discussed, but the digital delivery of healthcare makes it more feasible in areas where populations are more spread out. This could mean opportunity in emerging markets, or in rural populations. The international presence that Teladoc has will only help this cause.

Now while the Covid pandemic hasn’t been solely responsible for the growth of telehealth, it has certainly accelerated growth. In September of 2020, Teladoc forecasted that the telehealth industry will growth at a CAGR of 38% over the coming five years. While the pre-Covid and Teladoc’s figures are from two different study sources, I believe the uptick in growth is the relevant takeaway. During Covid there has been an acceleration in the unwinding of regulations and barriers to implementation for telehealth. Could these barriers be put back up? Sure, but I don’t think that is the likely outcome.

What you are left with is an enormous total addressable market that Teladoc is poised to take advantage of. Some reports have the global TAM at more than $500 billion by 2027, and the TAM in the United States alone is more than $100 billion.

Considered the leading player in telehealth, Teladoc is projected by analysts to generate just shy of $2 billion in revenues in 2021, which is still just a tiny sliver of the runway available to them. This will likely be a fragmented market with multiple winners, but Teladoc’s large scale and smart capabilities via Livongo make the company a strong horse in this race.

And even as Covid (eventually) passes, Teladoc is still going to continue to grow. Management has forecasted pre-synergy growth at 40%-45% in 2021 and 30%-40% over the next five years. I believe the “big picture” tailwinds that we discussed will give Teladoc a nice chance at beating this guidance, but even if they merely perform on this projected path, investors will be very happy. This is because of valuation.

Despite Teladoc’s strong top-line growth, large TAM, and position as a leading participant, the stock’s valuation is quite conservative right now. Trading in the low $180s as of the time of this writing, I like to look at Teladoc’s valuation two different ways.

First, at the current share price, Teladoc’s enterprise value sits at $27.8 billion. If we use analyst estimates for 2021 revenues of roughly $2 billion, the company’s EV to sales multiple is at just under 14X on a forward basis. For a company that is projected to grow at 30%-40% over the next half decade, this is quite a conservative multiple IMO.

Another way to consider the current valuation of Teladoc is this. At its pre-merger high point, Teladoc was roughly a $20 billion company. Teladoc’s acquisition of Livongo was valued at approximately $18.5 billion. The combined entity (post-merger Teladoc) is currently valued at just under $28 billion. In other words, it’s like you bought one company and got the other almost 50% off.

When you consider the marriage of the two companies and how the combined entity is likely to be a stronger business than either of the two stand-alone companies, the discount you are getting makes for an attractive valuation. This is especially so for long-term investors who plan to hold for the next several years, seeing the company’s growth projections through.

Teladoc represents an interesting opportunity as an innovative disruptor in one of the largest, most lucrative, and inefficient industries of the modern world – healthcare. The Livongo acquisition was really a game changer for Teladoc, and Teladoc’s large network will be able to grow and expand the reach of this new “whole-person health” ecosystem.

I believe that investors and the market as a whole are underestimating the long-term potential. Branding Teladoc as a “Covid play” that will simply retreat once Covid goes away is a mistake. Telehealth was trending up before Covid, and the economic and technological advantages of this technology will likely bring much needed efficiency to healthcare over the long term. I think that Teladoc will play a big role in that over the years to come.