While Teladoc's revenues will continue to grow at a healthy rate, I'm doubtful that it can ever achieve the margin necessary to justify stock valuation.
Here's some simple math on where margins needs to be in 10 years to call this a buy. Right now TDOC trades at $58/share, or about about $7.9bn enterprise value. Let's say I want 2029 EV/EBIT to be 10x to call it a buy, so by 2029 I need them to have EBIT of $790mm. Annualized revenue are getting close to $500mm. If revenue grow at 30% CAGR for the next 10 years, by 2029 revenue could be $7 billion. This implies an EBIT margin of 790/7000 = ~11%.
Can Teladoc get to this 11% margin? I doubt it. As I illustrated in my previous article, TDOC is less a tech company than a "sub-insurer" that its payer clients outsource to. Insurers like UNH and ANTM operate at 6-8% EBIT margin, and it doesn't make sense that TDOC can capture higher margin than its clients since it has a weak bargaining position relative to them.
Weak Strategic Position Limits Margin Upside
The problem is telehealth itself is not a thing, not if it's just doctors using video chat. What IS a thing, is the creation of a business model that 1) adds value to the overall system, and 2) captures part of that value.
Teladoc creates value for the overall system - many patients would simply not visit a doctor without TDOC. So they're creating value by competing against non-consumption.
To capture value though, disruptive entrants should have a separate value chain to avoid being co-opted by incumbents. TDOC does the opposite, it contorts itself to fit into the incumbent value chain.
Teladoc creates value for the overall system - many patients would simply not visit a doctor without TDOC. So they're creating value by competing against non-consumption.
To capture value though, disruptive entrants should have a separate value chain to avoid being co-opted by incumbents. TDOC does the opposite, it contorts itself to fit into the incumbent value chain.
In order to grow revenue quickly, Teladoc uses health insurers as distribution, so insurers ended up owning the end-customer (patients) relationship and TDOC's leverage is weakened. As I argued in the previous article, TDOC's true value proposition for payers (as opposed to for the overall system) is to control cost by turning a visits based variable cost into a per member per month based fixed cost. This is a nice to have, not a must have for its payer clients.
TDOC's margins already suffer from this weak position. It is forced to spend on marketing to drive utilization, even as that benefits clients (insurers) directly and hurts TDOC's margins (higher costs of service and marketing costs).
Nor is Teladoc integrated enough with patients to own that relationship and impose high switching cost on its payer clients. Although Teladoc has a separate registration, it's the insurers that really own the patient relationship. Not only because patients still go first to insurer portals, but also because the current TDOC value proposition simply isn't able to stand alone. Consumer cannot just use TDOC and leave their regular insurance plan - because if conditions get any worse they'll need to physically visit a doctor, which would be outside of what TDOC can offer. The perils of fitting yourself into incumbent value proposition!
Not owning the patient relationship leaves TDOC replaceable. Payer clients can swap TDOC out for another telehealth provider the second TDOC tries to go direct to consumer.
In this way, the center of gravity is with payer clients. They've managed to keep the most valuable part of the job and outsource what's NOT valuable to TDOC. Not only that they do it in a way with minimal tie-in, making TDOC replaceable.
Conclusion
An inherently flawed business model leaves TDOC at the mercy of its payer clients. This means low pricing power. This means the higher margins needed to justify stock valuation will be hard to achieve. It also means I should exit my position.
Conclusion
An inherently flawed business model leaves TDOC at the mercy of its payer clients. This means low pricing power. This means the higher margins needed to justify stock valuation will be hard to achieve. It also means I should exit my position.
Going direct to consumer and owning that relationship would be a good fix, but that requires Teladoc to further differentiate itself in terms of value proposition and value chain. My own recommendation is to achieve that through 1) focus on chronic care, 2) use of nurse practioners, and 3) ideally hire them as employees.
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