Reach Out and Don’t Touch Someone: Teledoc Health $TDOC

Ten Bagger or Bust

Welcome to the first trading day of 2025! As I write this, the futures are green across all the major indices. We will discover promptly if tax-loss harvesting sectors such as energy and commodities catch a bid in the new year.

For those who are new subscribers, my major themes for 2025 are:

1. Commodities, Inflation Protection, Gold, Oil, Land

2. The Revenge of Cathie Wood, Small Cap Tech

3. Mean Reverting Sectors, Consumer Discretionary

4. Trump Trades, Logistics, Reshoring, Small Cap Industrials

Today I want to dive into a small cap tech stock within software, but before I do, a quick reminder about the January New Year’s Resolution. For the month of January, I will do 1 pushup for every restack and 1 sit up for every like that each writeup receives. If the combined number of likes and restacks reaches certain milestones, it will create a narrowing window of intermittent fasting.

From yesterday’s article, I owe you all 47 sit-ups and 5 pushups. Since over 1,900 people read that article, I have to admit I’m a little disappointed in how few of you want to try and make me do some exercise.

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As I try and wrap my low-tech brain around this Artificial Intelligence Revolution, allegedly 2024 was the year of chips, but 2025 is the year where we need to see businesses actually implement and make money off of AI. One of the potential consequences of this is that we might learn which software companies are vulnerable, and which have durable moats. Until that answer is revealed, all small cap software stocks have been left for dead.

Take Teledoc (TDOC) for example. They are the market leader in their field, they have extensive B2B sales efforts to make their product a standard offering for corporate benefit packages, and yet their price to sales ratio has compressed from 19x to 0.59x. To be fair, their top line growth has slowed, and similar to most healthcare companies, have spent the last year trimming low value customers and focusing on margins. EBITDA margin has crept up from 1% to 7% over the last two years. When I think of my theme for the Revenge of Cathie Wood, I am thinking about a company where the stock price and the revenue look a lot like TDOC’s.

TDOC Revenue:

TDOC Market Capitalization:

As revenue has doubled from the start of 2021, the market capitalization has dropped from $44.69 billion to $1.53 billion. This is an unstable valuation. Either AI or competition destroys Teledoc, or the market has to start pricing them more appropriately.

Teledoc grew aggressively and filled the market on a crummy business model, becoming a part of employer benefits packages so that with a $5 copay, customers could have a videoconference with a doctor from their own home, and perhaps get a drug prescription without having to go to a physical clinic and sit in a waiting room. In the US, TDOC now has 93.9 million members enrolled in this system, still increasing slightly quarter over quarter.

TDOC has been slow to rollout what could be a winning strategy, and that is cross-selling to that client base. As the market matured, US employers didn’t want to pay for a Teledoc subscription, but rather a fee per use. Now that the fee per use is becoming the standard, TDOC can focus on making sure that their 93.9 million members satisfy more of their medical needs through Teledoc. The biggest opportunity is the Chronic Care Program, where currently 1.18 million members manage their chronic conditions through the TDOC platform. Management believes that this represents about 15% of the potential of that business segment. Another opportunity for cross selling is in mental health, TDOC already had 1 million mental health appointments last year, and this growing segment is starting to drive significant revenue. By bundling their capabilities and selling the bundle to employers, TDOC has a stealthy headstart and a competitive moat over Talkspace (TALK).

In order to better serve the Chronic Care patients, TDOC acquired Livongo, a smart medical device manufacturer for $18 billion, mostly in TDOC stock when the price was over $200. Now that the stock price has crashed, the current cost of the stock component of that acquisition is down to about $500 million. Livongo alone, if it were to be sold, would be worth much more than the current market capitalization of TDOC today, probably not the $18 billion that was paid for it, but certainly more than $1.53 billion.

As a market leader in their space, TDOC has started to expand internationally as well. Last quarter, about $100 million of their $640 million revenue was international. There are so many segments within Teledoc, they even have a hospital infrastructure component where monitoring systems within hospitals watch patients and use predictive analytics to try and prevent patients from injuring themselves by falling out of bed. I can’t help but wonder how enormous their total addressable market could be, and what kind of market share they could capture if they were well managed and fast moving.

But TDOC does not appear to be fast moving at all, and it is an open question as to whether or not they are well managed. They have a new CEO who is only 6 months on the job, and the culture of TDOC that I can glean from the earnings call makes me feel like they are more of a slow-moving healthcare company than a fast moving technology company. TDOC is starting to remind me of Opendoor (OPEN) and Cardlytics (CDLX), an incredible platform, with a strong moat, but management that is not executing on their potential. The size and the inertia of TDOC gives them some time to get their act together, but not an unlimited amount of time.

Teledoc’s management did not even mention Artificial Intelligence, except in the capacity that their enormous user base and market leadership position over the years has given them a massive set of data on which to use machine learning to improve efficiencies. If I were to speculate about which companies would be destroyed by AI, and which would use AI to their benefit, the regulatory framework in the US surrounding the healthcare system probably puts TDOC in a relatively safe seat. It is far more likely that AI companies will try and make tools to sell to TDOC for them to use than to create competition to TDOC and to try and recreate their 93.9 million members.

But there is a threat from DOGE, the Department of Government Efficiency, under Donald Trump and Elon Musk. It hasn’t been spoken about recently as a target for efficiency gains, probably smartly because any talk of healthcare reform terrifies the electorate, but the healthcare sector in the US is 17.6% of GDP, and in exchange for that spending we get worse health outcomes than other developed nations. I have to assume that Trump is looking at the bloated bureaucracy and poor outcomes in healthcare as an area to target, and he has promised to repeal Obamacare for at least a decade. As a low cost provider, would Teledoc be harmed or helped by any efforts to improve healthcare efficiency by the incoming administration? I think regulatory reform is a bigger risk to TDOC than Artificial Intelligence for the moment.

With a more friendly environment for mergers and acquisitions, at such a tiny market capitalization, such a large business with a defensible moat, as well as an enormous database of proprietary data, I think TDOC is a likely acquisition target. That is unfortunate, because a well-run TDOC could experience dramatic revenue growth from bundling and cross selling, and eventually enjoy a multiple rerating from 0.59x price to sales to somewhere around 5.0x where they had been consistently trading for years. If management proves capable, I could see Teledoc easily growing to $5 billion in revenue in the near term, and have a market capitalization of $25 billion, more than a 15x from here.

A lot is going to depend on this new CEO, Chuck Divita, and he’s a bit of an unknown. On the earnings calls he was overly humble. As an executive VP for Guidewell, a mutual insurance holding company, his division was responsible for $23 billion in revenue. His experience started in finance, but then pivoted over to operations, marketing, and brand management. Chuck had a bit of luck when his initiative to create an online portal for retail customers was implemented just before the Covid pandemic. It’s not unreasonable to think that Chuck could bring some of that luck to Teledoc. But I am discouraged by the lack of insider buying, even as the stock was $7, down from $265.

In the near term, the stock price looks like it was the victim of some brutal tax loss harvesting, TDOC’s stock price is at a lower resistance level, and could be poised for some short term positive momentum. The healthcare sector itself could receive some inflows from sector rotation in January.

I still like LifeMD (LFMD), I still am not too crazy about Talkspace (TALK), and I haven’t done my research yet on HIMS. There is a lot of fear regarding Amazon’s entry into telehealth, but I am more afraid that Amazon would buy TDOC than I am that Amazon would outcompete Teledoc in B2B sales at every human resources department in the country. Since LFMD and TDOC have the potential to be multibaggers, I am happy enough to split my position between them 50/50.