This is an update of a teaser solution from an older Friday File for everyone to read… I figure the Irregulars won’t be too upset, since the stock in question is up dramatically since this piece was published, but it’s still an interesting story — and a stock I own and would like to buy more of on any dips, so perhaps you’ll find it worth a read. The ad back in January that inspired the original coverage had the headline, “Amazon-like Profit Profile Could Double Investors Money Again This Year,” but now that the stock has been connected with coronavirus and had a nice run we’ve got the new “Why The Coronavirus Collapse is Sending This Stock Soaring” headline to work with.

What follows has not been updated since 1/17, and still roughly matches the clues in the newer version of the ad, but I have added an update note at the end.

The ad is from Mike Cintolo for Cabot Growth Investor ($247/yr), I started receiving it in early January and posted this teaser solution in the January 17 Friday File when he was calling this idea “The Next Amazon”… here’s how the ad starts:

“This Stock is on Track to Hand You 100% Gains

“How its Amazon-Like Profit Profile Could Double Investors’ Money Again This Year

“The financial media isn’t writing about it. Nor are the brokers recommending it.

“Yet, it’s on track to double investors’ money again, just as it has twice over the past two years.

“That’s why I’m writing: to tell you about this company that’s set to double investors’ money again this year … and become the next Amazon along the way.”

That all sounds quite generic, no? Indeed, Cabot uses very similar language to tease almost all of its growth stocks. How about some specifics?

“I’m not the only one who sees this company becoming the next Amazon-like success story. Wall Street’s top institutional investors do too, owning millions of shares worth more than $5 billion.”

That doesn’t really mean anything by itself, but knowing that the market cap is above $5 billion is a decent clue. What else?

“Over the past two years this company handed investors 50% more gains than Amazon, Apple, Facebook and Google—that’s 111% to 55%, 54%, 0% and 25%, respectively.”

He talks about “this year” as 2019, so presumably this data is a bit old (it made it into ads I saw on January 11, but the text for these often lingers and gets re-used from time to time). And Apple has risen by more than 100% since the lows of December 2018, not 54%, so that’s another indication that we’re dealing with some oldish or otherwise wonky data.

Other clues?

“Unlike Amazon, which sells everything under the sun, this near perfect company, the world’s leading provider of telehealth services (also called virtual care), allows millions of patients to access expert medical advice in dozens of specialties.”

And then these tidbits:

“• 40% of the Fortune 500, thousands of small businesses and a ton of public health plans have partnered with the company
• Sales up 24% in the most recent quarter, and management believes it has years of 20% to 30% organic growth (excluding acquisitions) ahead of it.
• Visit volume up 45% in the latest quarter to 928,000
• 35 million paid members in the U.S. alone and expanding overseas (up 54% from a year ago)
• 19 million more who have access but pay per visit (instead of per month) (double that of a year ago)
• Just inked a huge deal with UnitedHealth that brought on 15 million total users (paid and per visit)”

And he drops some hints about the specific holdings of top institutions and mutual funds, which means that the data in the ad could be from anytime in the past couple months (it’s still roughly up to date, with the most recent quarterly holdings updates generally being for late September)… and it also means that Cabot is definitely teasing Teladoc Health (TDOC).

Which is why I wanted to cover this one for you today, sneakily enough — because this is a stock I owned for a while and where I still see a lot of potential, and, more importantly, because Teladoc (TDOC) jumped into the headlines again this week with the announcement that it’s buying InTouch Health for $600 million ($150 million in stock, the rest in TDOC shares).

That fairly large acquisition (Teladoc is now a $7 billion company) further reinforces the main reason to buy the stock: That you believe it will be the eventual market leader in telemedicine, a very young industry, and that part of the reason it’s going to win is that they are in the best financial position among the many startups and competitors (they’ve still got more than $300 million in net cash, far more than any competing telehealth startups I’m aware of), with the largest number of current partners and customers.

Analysts were delighted, with most of them quickly boosting their target price by anywhere from $15-25… though, to be fair, the average target price is still in the high $90s, so the shares are essentially there already.

And I’d agree, consolidation is pretty clearly a good thing for this business — after all, the actual technology is not likely to be markedly different among the telemedicine firms. They’re all limited in that they basically offer video conferencing with some records management, privacy and other add-ons, and nobody really “owns” those technologies or has an obvious technology edge as far as I can tell.

Advantages here come not with technical superiority, but with scale… and probably the biggest advantage will be the network effect, because it makes sense that this should gradually become a natural monopoly or oligopoly. Doctors and hospital groups have little to no interest in dealing with four or five competing telemedicine platforms, they want one technology that works, or maybe a second one to keep the first company honest… so the technology that gets adopted by the largest number of providers and insurers and accepted by the largest number of patients is likely to be the one that “wins.” Having more patients embrace it will bring on the hospitals and providers; having more hospitals and doctors and insurers use it will bring in more patients, etc — it’s hard to beat the virtuous cycle of the network effect, particularly in an area like telemedicine, where everybody involved in the supply chain wants it to work and plans to invest in this trend (insurers can save money with more virtual visits, doctors can make their workflow more efficient, patients get convenience and, in some cases, access to providers who would otherwise not be geographically available).

Now, there’s no guarantee that Teladoc “winning” this early competition for market leadership in telemedicine means “you get rich.” Telemedicine is widely predicted to be a big business, and both providers and customers are pushing for that, but it isn’t there yet and it might not ever be — there are limits to what can be diagnosed by video, and limits to what people will pay for a virtual interaction with a physician, so to some extent you’re betting on an uncertain market.

We also don’t know who’s going to have the upper hand — the government? The insurers? Hospital groups? Or, might we hope, the technology provider? So there is a healthy dose of uncertainty to go with the massive valuation that TDOC trades at (13X sales, and they still lose 15 cents on each dollar of sales… which seems quaint compared to the crazy cloud stocks at 40X sales, but is still pretty high, even for a company growing revenue at 20%+ per year).

I was worried about the Teladoc board back in 2018, when they bungled their oversight role with the CFO (who embroiled himself in a sex/insider trading scandal with a subordinate a year or two earlier), and I lost confidence (which is why I let the shares be taken in a stop loss when the market collapsed at the end of that year), but are things improving on that front with new management? It finally seems that they have made some strides, and the new leadership team looks impressive to me (a new CFO and COO were added over the summer, both with larger-company experience), and there are a few board members now who were not there during the initial 2016 screwups… so that’s good.

I do like this deal — scale is huge for a network effect company, and Teladoc has been a serial acquirer trying to get that scale, with pretty meaningful acquisitions pretty much every year. This InTouch acquisition will provide both scale and some business model diversification (TDOC runs its own network of physician providers and deals mostly with large customers and insurance companies; InTouch sells the software/system to hospitals and other providers), and there’s at least a solid chance that it will let Teladoc take some real market leadership and close off the space available for competitors to try to squeeze in… but it’s early yet, and the market may well be overreacting on the positive side to this deal. It’s a $600 million deal, almost certainly at a premium to what Intouch would have gotten from a non-strategic buyer, and the market cap of Teladoc increased by $800 million on Monday, the day it was announced at the JP Morgan Healthcare confernece.

Put another way, though, you can see the real potential for this to help Teladoc’s valuation — they essentially bought $80 million of revenue for $600 million, and Intouch has been growing revenue a little more quickly than Teladoc (revenue growth of about 35% in 2019 for Intouch, vs. roughly 25% for TDOC), so it’s not an absurd premium to pay and it will actually be accretive on a price/sales basis… though not on income, of course, since neither Intouch nor Teladoc is profitable.

And things were generally looking up for Teladoc before this deal. They presented at the JP Morgan Healthcare conference on Monday and, in addition to the InTouch announcement, pre-announced that they had beaten their fourth quarter guidance pretty handily… so now the total for 2019 is expected to be at least $552 million in revenue and 4.1 million patient visits, with operating cash flow likely to be positive for the year for the first time… and that’s before they really begin to ramp up their latest Virtual Visit Provider contract with UnitedHealth, the largest private insurer in the US.

That patient visit number is key because it indicates that patients are actually using the service, and in greater volume each year — that represents visit growth of more than 50% from 2018, and that’s arguably more important for the long-term viability of the platform than the fact that revenue growth was much softer at 25%, since visits inspire patient satisfaction and attachment to the service, and help to convince new clients (particularly insurance companies) to join the platform and encourage its use. And the largest number of their visits are still sick visits from adults during cold and flu season, so the fourth quarter is a big one and the terrible flu season this year that took me down last week is also likely to give them a little bit of a boost.

InTouch Health should bring Teladoc more exposure to specialists, and that strong embedded user group in hospitals and health systems, and has 470 clients in 3,600 locations that they can leverage (including about 60% of the big US health systems). It’s also likely to be a higher margin business, supplying the operating system and software as opposed to actually staffing a virtual desk with doctors, so it will be interesting to see how those two different business models balance out inside Teladoc over time.

So yes, I’d like to get back into Teladoc following this strategically appealing acquisition and their success at improving the company in the second half of 2019. I’m not crazy about the current valuation in the mid-$90s after the very positive reaction to that acquisition, but if integration and cross-selling with InTouch’s customers goes well then this price can still be justified. I’m adding back a small position in Teladoc to the Real Money Portfolio, which is psychologically difficult because I’m paying more than I sold my shares for a year ago, though I will wait to see if we get better prices on some future dip to build it up. Earnings will come out on February 26, and they’ll have an investor day on March 5 so it should be an interesting couple months.

3/5 Update: Earnings did indeed come out on February 26, and that came just a day or so after the CDC started talking up coronavirus plans that might include heavier use of Telehealth services, and before you know it this is not just a beat and raise stock, but a beat and raise stock with some coronavirus exposure (in a good way), and it was off to the races with a 20% gain in a day after earnings… with some of those gains since given up.

Here’s part of what I shared with the Irregulars last week about that:

Teladoc (TDOC) reported a fantastic quarter on Wednesday night, but the stock’s reaction was wildly out of line with the financial improvement… they reported revenues that were about 2% higher than expected, with guidance for first quarter revenue about 4% higher than analysts had been forecasting (and full year 2020 about 2-3% above prior forecasts), which is certainly good, but the analysts came out en masse with dramatic upgrades, with price targets moving up across the board by 20-50%.

Of course, those price targets are almost all still below the current price — so something is going on other than analyst enthusiasm… and it seems likely that it’s mostly coronavirus speculation driving the stock to new highs this week. Teladoc is an operator of telemedicine platforms, where you can consult with a doctor via videoconference, and they are seeing growth in their platform thanks both to more pay-per-visit patients and a rapid growth in membership (folks who get Teladoc as a benefit, largely due to employer-covered insurance), so that’s good, but investors have also noticed that a company whose major visit driver in its first couple years has been “flu season” probably will have meaningful exposure to any surge in doctor demand because of the spread of COVID-19.

And that’s not entirely unwarranted — the CDC has specifically called out telehealth as one of the response tools that is likely to be used in the event of a more widespread outbreak in the United States (that came up in a Barron’s article early in the week, in addition to being in the CDC published updates on their website, so investors certainly noticed). It’s logical, and the reasons is the same reason that flu patients flock to Teladoc: People with contagious diseases who don’t need to be hospitalized are better off at home than in the doctor’s office, since traveling to the doctor is a hardship and the folks in that doctor’s office for other reasons don’t want to catch your illness. Add to that the efficiency of telemedicine in screening, imperfect though it is (you can’t get a blood test through your smartphone just yet), and it makes some sense that a worsening COVID-19 outbreak would drive a lot of business Teladoc’s way. It probably already is, given that a lot of their core customers are business travelers or people stationed overseas for work.

Is that possibility all in the stock after this 20% bump? Well, we’re not going to know for a while. I certainly don’t want to chase it with the shares up more than 20% in a day, but as things calm down I’d consider building this position on dips.

It could be that COVID-19 is a real game-changer over the long term for Teladoc, spurring much wider usage of telemedicine, and it’s encouraging to have a stock in the portfolio that doesn’t fear a pandemic, but that’s a pretty aggressive bet to be making at this point… I’ll just sit and watch for a bit here after this 40% surge in a month, the growth is great and I think the company has very nice long-term potential as the leading telemedicine provider, with a strong network effect as more patients and doctors grow comfortable with their platform(s), but we’re probably assuming too much straight-line success at this price.

And the dip after that big surge was pretty quick, so it was fortunate that we didn’t feel like chasing it in the $140s — but the low $120s seem more rational for nibbling on a speculative position, and I’m likely to continue rebuilding this holding if the shares stay at these levels or drop a bit further.

I wouldn’t buy just because of this coronavirus scare, but I do think it’s possible that the coronavirus and the possible increase in use of telehealth services will speed up the adoption of telehealth in general and “normalize” that kind of virtual health care interaction for more people, and that would be a good thing for the company as they build their business in the long term. It doesn’t mean they automatically get to hold their early advantage in the market, Teladoc is clearly the leader among “pure play” telehealth companies, but other big tech or healthcare firms could certainly try to develop their own systems, and some already have,

Amazon, for example, launched Amazon Care in partnership with a local clinic last year, and is pushing it out to more employees during this viral crisis — and it’s entirely possible that if the market decides that Amazon is going to coordinate with its Haven partners (JP Morgan and Berkshire Hathaway) to push Amazon Care out as a national offering for employees, or get more aggressive and release its own telehealth network for anyone to use, then Teladoc might fall 30% that day. People are terrified of competing with Amazon or the other mega-tech stocks, even if the specialized company might end up “winning” anyway (remember Facebook’s plan for dating that was going to crush Tinder and Match.com? MTCH shares cratered by 20% in moments after Facebook announced that service at its developer conference in May of 2018, and then fell again last last year as Facebook dating prepared to roll out after a test run, but if you had bought MTCH shares on the highs the day before Facebook’s 2018 announcement, with the unluckiest buy date possible, and held through all those big swings, including some wild ups and downs, you would have still beaten the market after six months or a year, and as of today your return (about 45%) would be triple the returns you would have gotten from the broader market.

I’d guess that the increasing adoption of telehealth is going to become an unstoppable trend, perhaps accelerated by this particular outbreak but quite likely to keep growing even without coronavirus, and that this underlying trend will benefit Teladoc nicely in the long run even though they’re not going to be the only provider or network.

That’s just what I think, though, and I’d be delighted to hear your thoughts — if you’ve got some TDOC thinking to share with us, well, feel free to use the happy little comment box below. Have a great weekend!

Disclosure: Of the companies mentioned above, I own shares and/or call options on Amazon, Apple, Google parent Alphabet, Berkshire Hathaway, and Teladoc. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.