We’ll start the week out with a teaser pitch I’ve been seeing from Jason Stutman for his Technology & Opportunity newsletter. As with so many stocks that are hinted at, this one plucks at our greed-strings via comparison with a massive success story — this time it’s Netflix, as Stutman refers to his “secret” pick as the “Netflix of Medicine.”
So… hoodat? Let’s start you off with a little taste of the ad:
“The Netflix of Medicine
“One unknown tech company is primed to dominate the $379 billion digital health market.
“Here’s why it could hand you nine times your money by mid-2018….
“Physical doctor’s visits are quickly becoming a thing of the past.
“No driving, no sitting in waiting rooms, no dealing with snarky receptionists…
“No wasted time, no going out when you’re sick, no sitting next to other germ-infested patients…
“Just simple, effective, and convenient care.
“It’s a revolution known as digital health. And as you might imagine, it’s growing at an astonishing rate.”Are you getting our free Daily Update
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That Netflix comparison comes from what he calls “physical disruption” — turning a physical experience into a digital one. For Netflix it was doing away with the video store (and later the DVD-by-mail experience) and providing digital video streaming… for this teased stock it’s what’s often called “telemedicine.” More from the ad…
“Until recently, doctor’s offices were a necessity.
“If you got sick, you’d have to go into the office.
“It was the same thing if you’d needed a prescription refill and an ordinary checkup.
“But that’s all changing.
“Thanks to ‘digital doctors,’ you can get instant health care at the touch of a button….
“Just like an in-person visit, the doctor takes your history and symptoms, performs an exam, and will recommend treatment.
“And it’s not just for if you have the flu or a bacterial infection, either…
“Digital doctors can provide treatment for 90% of the most common health conditions.”
OK, so yes, doctor’s visits via video chat — that’s a trend that’s been gradually developing for a long time, and which has seen a few waves of minor investor mania in the past 15 years or so. Which company is being teased here?
We don’t get a lot of clues, but there is this…
“… one small company has a grip on 75% of this entire industry.”
“The tiny tech company that I’ll tell you about today has saved patients an average of $500 per visit — a total of $493 million over a full year.
“And the company isn’t just saving its patients stacks of cash, it’s also saving them time, as well…..
“The Netflix of medicine isn’t just doing well for its customers, either. It’s also doing well for itself and its investors.
“This tiny company serves more than 20 million members with just 3,000 doctors, which keeps its operating costs incredibly low.
“And it just signed on 50,000 more doctors, opening the floodgates for tens of millions of new members.
“On top of that, its assets are worth more than twice its liabilities, even as a startup.”
And we’re told that this is the ONLY company in “this space” that has become profitable so far. Which certainly helps.
How big is this market? We get some more numbers from Stutman in the ad:
“Even though it’s relatively new, the industry has already shot from $240 million in 2013 to $2 billion today.
“But the truth is that this is just the beginning…
“Two years from now, the digital health market is predicted to be worth $86 billion:
“And by 2024, it’s set to hit $379 billion….”
We can probably all imagine what kind of risks this sort of company will face — regulation, liability, dealing with insurance companies, etc., so we won’t get too hung up on guessing what the risks are that this industry doesn’t hit $379 billion in the next six years, we’ll stick with the actual company and look at its real financials.
But to do that, of course, we first need a name — and the Thinkolator obliges, as it so often does. All those clues point straight at Teladoc (TDOC), which is, yes, pretty much the only large “pure play” telemedicine company, and one of the few, out of a wave of digital medicine startups, to have actually gone public.
So they seem to have a bit of a “first mover advantage,” if you believe their own assessments of the market — they do say they have 75% market share, over non-public competitors like Dr. Phil’s Doctor on Demand and American Well. And about 2/3 of states are apparently on board, requiring that virtual doctor’s visits be covered by insurers the same as in-person visits.
Which probably brings up the most important point: Patients are not likely to be the customers as long as our medical system is primarily controlled by private and governmental insurance programs… patients may decide what service they like, but it will be insurers who decide which services to cover, or which services to point their patients toward, and it will be insurers who pay most of the bill, most of the time. At least, outside of the “early adopter” customer group that can afford to pay their own $200 visit fee (or whatever it might be) for convenience.
I don’t know how this particular segment of the doctor-delivery industry will evolve, or whether there will be one or a few dominant providers like there are now, or if something completely different will happen… but Teladoc is pretty big right now, with a $3 billion market cap, and they are the only ones who can really capitalize on investor attention… at least, until American Well or another provider decides to go public.
That’s probably the biggest risk, that although Teladoc is likely the largest and the most visible company in telemedicine right now (at least for investors), there are easily dozens of other fairly substantial companies vying for some space in this segment, from American Well to MDLive to First Opinion to PlushCare to the Uber-inspired Pager (in-person “doctor delivery”), to technology vendors like Spruce or SnapMD who are trying to sell telemedicine services to doctors instead of to patients and insurers. It’s early days, to be sure… though, of course, when Netflix was still primarily a DVD-by-mail company there were also other streaming technologies and services trying to take the lead in that space.
So I have some sympathy for the guess that Teladoc will continue to lead, if only because there’s a huge first mover advantage in getting a large base of physicians, patients and insurers comfortable with your service.
Will that make them profitable? Maybe. They’ve just about doubled their number of members to 23 million since going public in mid-2015, and expect almost two billion visits and 8% utilization of their service in 2018, with strong revenue growth (50% growth expected in 2018) and a pretty large number of clients (300+ Fortune 1000 companies, 35+ health plans, 250% hospitals and health systems, all according to their March Investor Presentation).
And while they might not technically be profitable (their guidance is that they still think they’ll lose at least $1.36 per share in 2018), on a non-GAAP measure their Adjusted EBITDA will be positive. That, along with a strong first quarter announced a couple weeks ago, was enough to generate a nice reception for their latest capital raise, which was a convertible bond offering, and the stock has been surging this year.
Like many startups, Teladoc has to basically balance itself between maximizing profit and investing in growth, and they’re choosing to invest pretty heavily in growth, through both acquisitions and pretty heavy marketing spending… presumably because they want to protect and grow their market share as this still fairly small segment matures. So they’re not terribly likely to become super-profitable, but their margins have been gradually improving — when they first came public they were spending $1.75 for every dollar of revenue they brought, and last year that had improved to $1.45, so that’s good, and the top-line revenue growth (more than 50%) and the efficiency of their model should let them turn profitable soon if that becomes a priority.
The valuation on a price/sales basis is pretty high, roughly 10X sales (when Netflix was growing revenues at 25% five years ago, for example it was down at about 5X sales, though the comparison is not terribly apt in any other way).
And, well, that’s about all I can tell you after reviewing a few investor presentations and looking at their numbers. I’m pretty sympathetic with the notion that a lot of routine medical care will move to the virtual world, but even if that’s true I think much of the investment premise at this point will be based on your judgement about “are they far enough ahead of their competitors to continue to dominate,” and I can’t answer that without looking into the client base of those other major competitors and interviewing customers or trying out the different products from Doctors on Demand or American Well and trying to really determine whether they have any kind of sustainable advantage.
I can tell you that on an earnings basis, analysts still expect them to be losing money next year, with the average analyst predicting 96 cents as the “loss per share” number for 2019, but that also assumes a pretty rapid deceleration of revenue growth (from 50% this year to about 25% growth next year). I don’t know whether that’s fair or not, but it does leave room for the possibility that the analysts are being too conservative.
So… sound like your kind of story? Expect great things from the “Netflix of Medicine,” or do you think the valuation is too rich, or the competition too stiff? Let us know with a comment below. Thanks for reading!
P.S. There’s also a “retire early from the death of Monsanto” pitch for a second “special report” in this ad — that’s one we covered a while ago, the stock’s down about 20% from when we covered the teaser of that pick back in December.