Investor sentiment surrounding Teladoc (TDOC -1.48%) has been bad for a while now. The telemedicine specialist's stock is down 95% from its all-time high in 2021.
Teladoc's business boomed during the early days of the COVID-19 pandemic, benefiting enormously by providing at-home virtual care to patients. But like so many of the other "stay-at-home" stocks, Teladoc has struggled mightily since life returned to normal. The company is not currently profitable, and with demand for virtual care waning, investors have mostly thrown in the towel.
To cap off the misery of the past three years, Teladoc's CEO abruptly left the at the beginning of April.
Teladoc's earnings have never lived up to Wall Street's hype
Despite great promise and a successful, wide-ranging deployment of virtual medical care technology, Teladoc has struggled to earn positive net income. The slowing demand for virtual care combined with continued losses stemming partially from the acquisition of Livongo Health led the company to record an impairment of non-cash goodwill of over $13 billion in 2022.
For 2023, Teladoc lost $220 million, or $1.34 per share. This was a huge improvement over the impairment-impacted results of 2022, but still left the market cold on the stock.
Teladoc generates free cash flow and trades at less than 1 times sales
Teladoc is losing money and revenue expectations have fallen accordingly, but it's not all bad news at the company. Unlike many formerly high-flying tech stocks, Teladoc generates positive free cash flow. In 2023, it generated more than $190 million in free cash flow. Its current price-to-free-cash-flow ratio is 12. In fact, the company is reporting accounting losses primarily due to stock-based compensation (a non-cash charge) rather than a deficit of operating cash. In 2023, Teledoc disclosed $201 million in non-cash stock-based compensation charges.
Perhaps even more appealing to fundamentals-focused investors, Teladoc is trading at a price-to-sales (P/S) ratio of less than 1 (0.92), an indicator of relative value.
For context, consider competitor Doximity, which trades at a P/S ratio around 12. Doximity's price-to-free-cash-flow ratio is an inflated 29. While it should be noted that Doximity is turning a profit, Teladoc's stock is significantly undervalued in comparison.
Teladoc could be a buy
Things may have been ugly the past three years, but Teladoc has done a great job of "taking a big bath" by disclosing reams of bad news in a short time period. Investors can't reasonably expect a surge in net earnings or a return to the frothy valuations of 2021, but Teladoc stock is trading at a very attractive P/S ratio of less than 1. Furthermore, the company has a proven track record of generating positive free cash flow.
Management is also taking steps to improve results while revenue growth remains weak. Its cost-saving efficiency program is projected to boost gross margin by as much as 1 percentage point in the next three years. Executives also expect adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase by nearly $100 million by the end of 2025. The recovery may be slow, but it seems that the company has at least hit bottom.
With the stock down so sharply from its peak, and more than 52% off its 52-week high, Teladoc merits a serious look. Patient investors looking to invest in a turnaround story with the safety of positive free cash flow and substantial value compared to direct competitors should look no further.
