I thought Teladoc stock might be a buy. I was wrong — and capitalized software costs are the reason why.
Teladoc Health (TDOC -5.25%) stock, the telemedicine specialist that made the controversial decision to spend $18.5 billion on diabetes care company Livongo in 2020, reported more bad news last night, sending shares down 8.7% through 10 a.m. ET.
Analysts following Teladoc forecast the company would report quarterly losses of $0.35 per share on sales of $649.6 million. As it turned out, the news was even worse: Teladoc lost $4.92 per share on $642.4 million in revenue in the second quarter of 2024.
Telemedicine was bad business in Q2
Teladoc’s once-rapid growth is history. Q2 sales dropped 2% year over year. Telemedicine per se wasn’t the problem (5% growth in this segment was actually OK). Rather, tele-psychological care — the company’s BetterHelp unit — struggled in Q2, with sales down 9%.
But what really jarred investors wasn’t Teladoc’s anemic sales, but its massive charge to earnings — $4.64 per share — as it continued writing down the value of Livongo. That massive noncash asset impairment charge made up 94% of all the losses Teladoc reported in the quarter.
Is Teladoc stock a sell?
So sales are slow. But management says sales growth could resume in the third quarter, and reach the “low single digits to mid-single digits” by the end of this year. At the same time, free cash flow — while not as robust as it once was — looks better (at least at first glance). In the first half of 2024, Teladoc generated $97.6 million in operating cash flow against capital spending of only $3.1 million. This suggests that annualized free cash flow could be as much as $189 million this year — except for one thing.
Teladoc capitalizes its software costs, and when you subtract this number, too, from operating cash flow, it turns out that real FCF was closer to $34.3 million in the first half, implying $68.6 million for the year. On a $1.5 billion market cap, that works out to a price-to-free-cash-flow ratio valuation of 22 — not too expensive, but not nearly as cheap it appeared at first, with growth so slow.
Teladoc stock remains a sell for me.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Teladoc Health. The Motley Fool has a disclosure policy.
