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Tickers mentioned in this show: TDOC, NFLX
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EDGAR archive of public company filings at the SEC: https://www.sec.gov/edgar/searchedgar/companysearch.html
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Welcome to Fluctuating Tides, the Podcast, Episode 2. I’m your host, SomeCodingGuy, and let’s get right to it!
This week I’m going to be analyzing Teladoc Health, ticker TDOC, a disruptor in the virtual health care space, providing health care consultations and services to members remotely. Teladoc jumped a lot in popularity as the COVID-19 crisis expanded and a lot of employers decided to add virtual care services to their health plans.
For this week’s knowledge segment, let me dispel a stock myth right now. Stock prices do not tell us very much about how expensive or cheap a company is compared to other companies. They’re more useful for telling us how a share of one company is doing vs. a previous version of itself. Looking at the stock price of two companies doesn’t tell you which one is “more expensive” - let’s take an example:
This past Monday, Netflix was trading around $550 a share. The same day, Teladoc was trading at $145 a share. Does that mean that Netflix is worth almost 4 times as much as Teladoc? No! Sure, the share is about 4 times more, but you don’t know how many shares of Netflix are out there vs. how many are out there for Teladoc.
If I make 4 slices of a pizza or 8 slices of a pizza, which pizza is bigger? If we want to use slices, sure, we need to know how many there are, but we also need to know how big each slice is. Pizza is just too important to leave this to chance.
Well how many slices of Netflix are out in the world and tradable? That’s called “Shares Outstanding” (or “Shares Out”), and the company reports this number in its filings. If we look that number up and multiply by the price of each share, that’s the market capitalization, or market cap. For investment purposes, that’s the number that I’ll use to compare company sizes, or to start figuring out which one is more “expensive”.
As of Monday, Netflix’s market cap was around $245 billion, while Teladoc’s was around $23 billion. So Netflix isn’t 4 times bigger than Teladoc, it’s almost 11 times bigger! When I’m looking for growth opportunities, I usually try to stick to companies that are smaller with room to grow, rather than the big behemoths. The bigger companies can also be interesting, but we’ll cover that in another episode.
After reading some news about Teladoc and listening to an earnings call, I got curious, and decided to dig deeper into their financial statements.
Public companies in the US report how they did every quarter of the year via filings made with the Securities and Exchange Commission, or the SEC. The SEC keeps an archive of these filings, and they’re available for free to everyone on sec.gov. Ok, I usually end up googling to find the actual system there called “EDGAR”, but we’re talking about stock today, not web development. I’ll include a link to EDGAR in the show notes.
There’s two forms I’ll focus on for analysis - the 10-Q, a quarterly report, and the 10-K, the full year report. Despite what you might read, they’re both free if you get them from the SEC, so - just get them from the SEC.
A 10-K is just a long version of the 10-Q, with more auditing. While these things can be hundreds of pages long, I usually focus on just two parts: the financial statements, which includes the balances and income or loss figures, and the management discussion, which gives a more talkative read on how things went, and where they’re going.
I noticed Teladoc bought a lot of companies, but acquisitions can distort the figures as the companies get fully merged, so I made a mental note to be careful with the numbers.
They measure their customers by what they call “clients” and “members”. “Clients” are businesses that add Teladoc as a care option, while “members” are actual people covered by the service. That makes growth a little bit lumpy, because if you sign up a company with a couple million employees, you added only one client, but a lot of members. That also means sales are complicated and long term, since they’re not selling something simple like pizza, but a longer term service with a sticky integration - businesses don’t just change their health care options every day. I imagined myself sitting in a conference room trying to sell this service to a company - what would I be saying? And that got me thinking about the business.
Then I eyed up the financials. They have about a billion in the bank, costs track growth or better, and in the last two years they went from 27 to 52 million members. That makes sense with COVID happening over the same period, but that also may explain why growth is slower now - a lot of companies that were thinking about adding virtual care probably already signed up. The last few quarters slowed down to about a million members a piece, and the lack of growth probably annoyed wall street and may explain why the stock dropped a lot this year. A lot of my best stocks have shown up when Wall Street was annoyed, so I began looking for signs for if the business had fundamentally changed or if the stock had just dropped a lot. I didn’t see anything obvious, so I kept going.
So how is their day to day business doing? Sales went from 130billion to 503billion over the last 8 quarters, and while members are doing visits more often, they increased from 4% to 6%, the company went from making about 5 bucks to 10 bucks per member over the same period. Gross margin had returned to a stable 70%, which is just comparing how much money the company has to work with based on what it sold. There were a lot of stock options being cashed, but that isn’t surprising when the stock had gone up so much.
For faster growth, they’re doing a big push on sales and marketing, but the invesments have been paying off. Tech investments are up too, probably as they’ve seen the platform double in size and as they find more aspects of care to cover. The CEO, Jason Gorevic, looks popular on glassdoor, and if they shut off all the growth tomorrow, they have plenty of server capacity and plenty of room to improve the service, and plenty of room to grow just with existing members, but I think the member growth slowing down is just a short term thing due to companies signing up so much during the pandemic.
I liked what I saw, so Tidal River is going to take a position in Teladoc this week.
I wrote down a more detailed version of this and included the numbers I pulled from the filings on a spreadsheet, which I’ll attach in the show notes. While this is a more risky stock that’s seen a wild ride through most of the year, given its size and future growth and the way it’s improving the industry, I’m interested, and I’m putting my money where my mouth is.
If you like the podcast and want to see more content like this get created, feel free to subscribe on your favorite podcast app, or buy a photo from tidalriverinvestments.com - money earned on the photos gets deposited in the investment account. As always, Tidal River Investments and I are not financial advisors, market analysts, or otherwise in any way offering advice for or against any of the securities discussed - meet with a financial advisor for that information. Stocks and funds may not be good investments for you, depending on your financial situation.
We’re here for learning, not advice, and I wish you the best on your financial journey, and remember, tides fluctuate!