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Avoid Teledoc Health After Its Stock Rose 131.9% Since January 2020

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Teledoc Health (TDOC) is a virtual health provider… With a telehealth platform that delivers 24 hour on demand health care via phones, tablets, the internet, and video.

It’s based in Purchase New York.  It has a $28.53 billion market cap.

Because of Covid its stock skyrocketed last year by 131.9%… But today I’m going to tell you why to avoid its stock.

The first major reason, its unprofitable… By a huge margin.

Teladoc Health Is Wildly Unprofitable

Over the last 8 years – its financials only go back to 2013 and it IPO’d on July 1st, 2015 – it earned an average operating income margin of negative 34.54% per year.

I look for anything above positive 10%.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Since 2013 its negative 25.89% per year on average.

I call this the “Cash Machine” metric.

I look for anything above positive 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

Teladoc doesn’t even come close to either metric for me.

Here’s what that really means.

Since becoming 2013 Teladoc’s lost a total of $753 million in operating profit.  And a total of $244 million in free cash flow.

Even during 2020 which was its best year ever in terms of revenue due to Covid, it generated $1.094 billion in sales… But lost $418 million in operating profit.  And $80 million in free cash flow.

How has the company survived since 2013 since its never produced an operating profit and only had one small profit in terms of free cash flow?

By issuing more shares.

In 2013 it had 28 million shares outstanding… While today it has 91 million shares outstanding.

This means its issued 63 million shares in the last 8 years.

What does this really mean?

That Teladoc just to stay alive has had to dilute shareholders by 225%.

All else remaining equal this means 2021 shares of Teledoc are worth 225% less than they did in 2013 due to this share issuance.

The easiest way to think of this is with a pizza.

There are the same sizes of pizza now and in 2013… But due to the dilution your slices – earnings and value per share – are now 225% smaller due to the dilution.

This happens because over the long-term companies are valued based on the profits and cash flows, they produce… And with more shares outstanding those profits and cash flows are spread out over more and more shares.

Normally this plays out with a massive drop in the share price over time.  But that didn’t happen with Teladoc.  Why?

Because people bought up its shares like crazy after Covid hit due to more people using telehealth services.

And this leads to another reason to avoid its stock.

Teledoc is Massively Overvalued

Most of the time here I show you various relative valuations to prove to you that something is either overvalued or undervalued.

I can’t do that today because of Teledoc’s unprofitability though.

So how do I know with 100% certainty its massively overvalued?

By comparing it to a company with a similar market cap.

In this case Xilinx which I’ve already written about a few times and told you to buy.  Its current market cap is $29.2 billion as of this writing.

In the last year Xilinx produced total revenue of $3.053 billion.  Operating income of positive $760 million.  Net income of positive $621 million. And free cash flow of positive $1.129 billion.

Meanwhile in the last year Teladoc produced revenue of $1.094 billion.  Operating income of negative $418 million.  Net income of negative $485 million.  And free cash flow of negative $80 million.

In fact, last year alone Xilinx generated more revenue, operating income, net income, and free cash flow than Teladoc has in its entire history… Yet they’re valued about the same.

And Xilinx’s valuation metrics are as follows which means its overvalued by a large amount by itself.

Its P/E is now 48.1.

Its P/CF is 24.9.

Its forward P/E is 33.1.

And its enterprise value to operating income – EV/EBIT is 36.5.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

This means, Xilinx is overvalued by a huge amount now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Xilinx being overvalued it makes the investment riskier… And because of Teladoc’s huge unprofitability this means it’s even more overvalued… Which makes investing in its stock far riskier.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – avoid investing in Teladoc and instead look at some other great stocks below.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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