The novel coronavirus pandemic has triggered growth in several industries, including virtual meetings, online gaming, and telehealth. Research by Fortune Business Insights indicates that the global telehealth industry was worth $61.4 billion in FY2019. The industry is expected to grow at a CAGR of 25.2% through FY2027, reaching a market size of $559.5 billion.
With the industry on a high-growth trajectory, it seems like a good idea to have some portfolio exposure to telehealth stocks. Teladoc Health (TDOC) is one name in the industry to consider. Teladoc has a secure platform that facilitates remote medical care at all levels, including preventive medicine, mental health, and acute care.
In February 2021, TDOC stock touched a high of $308. Shortly thereafter, valuation concerns triggered a correction in the stock, and it currently trades at $151.
However, it seems like the worst might be over in terms of correction. Recently, Jailendra Singh of Credit Suisse maintained an “outperform” outlook on the company with a price target of $264. This would imply a potential upside of 75%. (See Teladoc stock analysis on TipRanks)
Strong Growth Likely to Sustain
For FY2020, Teladoc reported revenue growth of 98% on a year-on-year basis to $1,094 million. Recently, the company reported first-quarter revenue growth of 151% to $453.7 million.
Furthermore, revenue for FY2021 has been guided at a mid-range of $1,995 million. This would imply year-on-year growth of 82%. Clearly, the company is on a robust growth trajectory and is now targeting 30% to 40% average annual revenue growth through FY2023. Top-line growth is likely to remain strong in the next five years, considering the expected expansion of the telemedicine industry.
The company’s membership rates are another positive factor: Teladoc ballooned to 51.8 million paid memberships in FY2020, compared with its FY2016 number of 12.1 million paid memberships. For the current year, the company has guided for paid memberships in the range of 52 to 54 million users. This provides clear revenue visibility, as 80% of the company’s revenue is subscription-based, and its subscriber retention rate is an impressive 90%.
Further, the swelling number of paid members is likely to have a positive impact on adjusted EBITDA margin and operating cash flows. For the current year, Teladoc has guided for adjusted EBITDA in the range of $255 to $275 million. Once operating cash flows turn positive, the stock is likely to trend higher.
The company’s acquisitions are another significant angle to consider. Between FY2017 and last year, the company has made five acquisitions of companies in related industries, such as medical consultation firm Best Doctors. These acquisitions have helped Teledoc extend its reach into several foreign markets, including Canada, France, and Latin America.
This type of inorganic growth stands to boost the company’s growth rate above the industry average. As of March 2021, the company reported cash and equivalents of $720 million, meaning it has ample financial flexibility to pursue further acquisitions.
Wall Street Weighs In
The analyst consensus rating of TDOC is a Moderate Buy, with 14 Buy ratings and 9 Hold ratings. The average analyst price target, based on 23 analysts offering twelve month price targets for Teladoc in the past 3 months, is $240.55. That implies upside potential of 59% from the market price of around $151 on May 7.
Bottom Line on Teladoc
Teladoc is looking at global growth opportunities, but the market in the United States is far from its saturation point. The company had 73 million members as of Q3 2020, just a small fraction of the total U.S. population of 320 million. It hopes to recruit many more members by tapping into the 65 million people who are served by medical professionals using Teladoc’s platform. With an ever-expanding client list, that strategy seems to position the company for growth.
Given all these factors, the stock correction seems like a good accumulation opportunity. Once EBITDA and cash flow accelerates, the stock has the potential to surge.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.