By - k_ristovski
Wow, I'm so glad I found an investing subreddit with real analysis. Great work!
Thanks Jimmy, i am glad you enjoy the post!
Great analysis. This is also a great sector to be in. Cathie Wood may be wrong about a lot of things, but I think she is correct about this being a sector with huge growth prospects. I am not invested in TDOC but I am invested in DOC.V here in Canada.
In my opinion, Cathie Wood is a storyteller. There's always a big story, and a high target price and that often leads to disappointment.
Here's just a couple qualitative nuggets, as a mental health clinician who sees over half my clients via teleheath. I'll focus on Teledoc's BetterHelp purchase, & some may apply to their 9other practices. Others might not.
1) BetterHelp seems to have a huge problem with therapist turnover & I keep hearing the same story: my therapist kept cancelling, then left, & I had to start all over with a new therapist. When they did the same thing...
2) There are some other online competitors who seem to provide more stability.
3) You can much more working in a small practice, and because there is such huge demand for therapists & prescribers, only those who need a particular situation that gig work provides or who nobody will hire despite said shortage will end up in this arrangement.
4) Therapeutic success for clients, & therefore retention, is built on the rapport developed more than any other factor. I'm really skilled by most standards, but when push comes to shove, that isn't as important as the therapeutic relationship. There's a well supported literature backing this up.
5) A new entrant to the market will not find that BetterHelp has much of an advantage due to a little bit of name recognition & a temporary advantage in SEO.
6) Almost every practice management package offers telehealth as a feature at no additional cost.
7) a bunch of these telehealth providers in mental health, including BetterHelp, have been busted for selling client data.
8) there are traditional provider-owned services in several specialties, that offer competitive prices to hospitals & other institutional buyers & attract providers who own the business & keep what Teledoc & it's kind pay out to non-providers. So, there is not much room for growth into that booming market of hospitals outsourcing to cut costs.
8) Managed care/insurers are going to start offering the AI components to reduce costs & offer low cost benefits when they compete over landing employer-provided healthcare plans. There will still be need for actual therapists, but the AI stuff will be iffered free through insurers in short order.
In short, I see numerous problems in the model & no real moat to protect against new entrants taking market share.
Just my 2 cents.
Thanks a lot for sharing your view and experience, it is much appreciated!
I really liked what I thought TDOC could become when they made the Livongo acquisition, but as time has passed it just doesn’t feel like they’re the team/company who will crack a true breakthrough in digital healthcare.
A very different business model, but in the broader digital healthcare space I have more faith in someone like DOCS continuing to execute on a better business model, or just outright choosing a giant like UNH to continue being ahead of competition, than I do with TDOC.
The international dimension is the interesting part for me, because I'm most interested in a company's ability to grow beyond its own borders.
International revenue is just shy of 15% of revenue, which honestly is a lot higher than I would imagine. The reality is that most countries don't have private health care systems and I would imagine there is far less to almost no opportunity there. In Canada, for example, citizens don't pay for health care, so there's basically no significant revenue potential in the country.
In terms of revenue growth, its fourth quarter US growth was 45%, which is impressive, and 40% internationally, which is lower, but still higher than I would guess.
I think it's really about the long game with the company. Because it's a relatively young company, how long can it keep those revenue numbers growing, and how long can it do it internationally? What's the real opportunity there?
I think I'm like you in that I see all sides of the coin. This is a hard one.
I cannot agree more!
Aren't they just a call center?
Nice work on the valuation.
Too many competitors , not enough of a moat in my opinion. I work in healthcare finance and have a graduate degree in healthcare administration. No doubt the future of healthcare is digital, however look at who controls where patients go for care, it's the insurance companies such as blue cross blue shield, UnitedHealth etc .. , blue shield is developing its own product from my understanding. I've personally used pocketdoc and videyo. So the question is, what is their competitive advantage?
I am glad you enjoyed the post. It seems as if it is difficult to create an advantage here apart from being the first mover and taking a large portion of the market quickly. I guess employers aren't willing to switch for another competitor, because, well, the competitors also don't have an advantage, so switching doesn't add value.
You can’t use a DCF to estimate the the value of something with negative cash flows. DCFs are inherently inaccurate in their face, add on the difficulties of predicting when and if a business becomes profitable and it’s an impossible task.
Typically in these types of profit less fast mover tech companies, when easy money runs out their business model is forced to change substantially and only then do you find out which revenues were accrued organically and which were paid for out if shareholder equity.
What are your thought on Damodaran's [paper](https://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch22.pdf)on valuing negative earnings firms?
on page 39: "\[...\] Valuing firms early in their life cycles poses similar problems, but they are accentuated when earnings, cashflow and book value all turn negative. In most of these cases, discounted cashflow valuation is flexible enough to be used to estimate value."
Damodaran is talking about firms with histories of earning profits temporarily generating negative earnings. I was talking about startups that have never established a profitable business model. Sure if a business has an established earnings power you can use a DCF to calculate its value based on **when you think** it will return to profitabilty.
The "when you think" part again introduces complexity that makes it much harder. And even for profitable businesses Buffett thinks doing DCFs is worshipping at the altar of false precision. Damodaran thinks every valuation is only or best solved by a DCF, Buffett believes no valuation is difficult enough to require doing a DCF.
Even though I respect Damodaran for his educational efforts, I agree with the logic of the guy who actually invests and has one of the best ever track records, not the academic in love with his favorite tool.
I disagree with your statement that DCF cannot be used to value something with negative cash flows. The value comes from the positive cash flows down the line. However, we can respectfully disagree. Feel free to share your approach.
First, Buffett would tell you that DCFs can't accurately calculate the valuations of profitable businesses, which is why he never does any for any investments. He calls it worshipping at the alter of false precision.
If you understand DCFs, you understand the reason. Relatively small changes equal large changes in valuations. Change the growth period slightly, or the growth rate a small amount or change the risk free rate a little bit, and suddenly you have a signifcantly different valuation. How accurately can we really estimate growth periods or growth rates for the vast majority of businesses?
Second, if accurate valuations are difficult to make for predictable businesses, accurate valuations using DCFs for uproven startups are absolutely impossible. When will TDOC start generating positive cash flows? How profitable will its business model become? How fast will it grow? Move profitablity out a couple years and your valuation dropped substantially. Lower growth rate by 5%, same thing.
Lastly, you don't know what TDOCs real growth rate is. Its spent billions in venture capital buying revenues. Now that crutch has been taken away, how many revenues remain and how fast will the grow organically?
The Norden Bombsight was an incredible computer for its day.
"It was an early tachometric design that directly measured the aircraft's ground speed and direction, which older bombsights could only estimate with lengthy manual procedures. The Norden further improved on older designs by using an analog computer that continuously recalculated the bomb's impact point based on changing flight conditions, and an autopilot that reacted quickly and accurately to changes in the wind or other effects."
The US spent over a billion dollars on it in WWII (when a billion was a billion), because it could place bombs within 75 feet of its target. But in actual use in combat areas its accuracy dropped to 1,200 feet.
Doing DCFs in tests using example problems can't be translated to the real world with any reasonable accuracy, just like the Norden Bombsight.
Buffett is not investing in companies at this stage and I am not intending to copy him. I agree that changes in the assumptions lead to changes in valuations and I can choose more conservative assumptions, to be on the safe side and add a margin on safety on top of that.
As for the accuracy, there's no accurate valuation, all of them are attempts to assess the value. I know I'm wrong, the question is, can I be less wrong than the market in the long run?
This is an approach that has worked for me and that's the reason why I still use it. If at any point, there's a better approach, I'm open to it. However, in the meantime, I am not going to invest based on the market sentiment or the management's story.
Maybe a question back, how would you value Teladoc?
I would value it at zero until it established a profitable business model.
If that is your approach, then Amazon was worth $0 for a very long time.
So, you would've been valuing Amazon at $0 for a very long time?
Amazon had positive cash flow.
And it lost 95% of it's value in less than two years when the last bubble popped, and didn't recover for a decade.
C'mon the guy did a solid analysis.
You can absolutely use a dcf to value money losing companies.
Buffett would tell you that you can't use a DCF to value a profitable company either.
Do you know why Buffett never does a DCF for any of his investments? Because he believes DCFs offer false precision, and aren't necessary.
I just watched a YouTube video where buffet explained how to calculate the intrinsic value of a company. He used DCF .
Buffett tells you that the future value of a company is the discounted future cash flows it generates. Buffett also never does a DCF for any of his investments.
Do you see the difference? There is a difference between the theoretical basis for value investing, and the tools that make sense given the information you can have available.
Are you saying early stage companies cannot use DCF because most will have negative CF. ? If so, what are the alternatives for valuation ?
For a value investor the alternative is to give it a valuation of zero to approximate the 90% that end up worthless.
If I wanted to be a VC, I'd have to estimate future sales and the profitablity of its future business model, and what that would be worth in an exit either as a public company or acquisition. I wouldn't waste time on DCFs with a ton of variables that each can easily change the answer significantly.
Instead I'd say if it grows 50% a year to $1B in sales in 5 years with 12% after tax profit, it should trade at 40x earnings and be worth $5B. I'd assume it fails 90% of the time, so an average payout of $500M. Then I'd calculate likely dilution if it succeeds, lets say 50% dropping the average payout for present day shares to $250M. Then if I wanted 20% annualized returns, that tells me I can't pay a valuation higher than $100M.
Look at all those moving parts. I wouldn't spend another minute trying to calculate that better, instead I would focus on the moving parts that would limit my risk and increase my upside the most. That is failure rate and future margins.
If I looked at a hundred of these startups a year I would try to focus on the ones that clearly had the best business models, future moats and strongest management teams, even if I had to pay up over $100M valuations for them. If all my picks cost $150M valuations but only averaged an 80% failure rate and the winners averaged after tax margins of 20%, I'd be crushing it.
Investing isn't about pretending you can calculate valuations hyper-accurately, it's about doing the research to find situations that are so obviously offering a high return that you don't even bother to calculate it.
Thank you for sharing. I found your analysis easy to follow.
Thank you for the feedback, I am happy the post was easy to follow :)
Hey how do I learn how to do this kind of analysis? Quick answer perfectly fine, even just a book title or two. Engineering student here wanting to actually make money.
Edit: Thank you, this post has inspired me, much appreciated.
I'd recommend professor Aswath Damodaran, definitely the best resource out there. He has quite some books (on different topics) and also has his courses from NYU available for free on his YouTube channel (including a course specifically on valuation). Learning the ins and outs definitely takes time and he is at least making this topic interesting and easy to understand.
P.S. I am glad you enjoyed the post :)
Avoid Damodaran and DCFs, they are busy work that just leads to false estimates of precision.
The key to finding opportunities in the market is through research, reading 10ks and financial filings to understand businesses. You want to find situations where the financials don't accurately describe the actual economic value of the business, causing them to be mispriced in the market. Their assets can be undervalued, their earnings could be underreported, their growth rate can be different, their moat can be far stronger, etc.
When you find a good opportunity as Buffett says it will leap out at you and the valuation won't require a spreadsheet to estimate.
1. Its never generated positive cash flow (adjusted for share based compensation).
2. We don't know if its business even makes sense.
3. Its going to have to replace $300M+ a year of share based compensation with cash or far more shares given most employees are far underwater on their options now and probably won't value new options highly.
4. We have no idea what its real growth rate is since its been buying new business throughout its existence. We do know that future growth rates are going to have to be organic only and will be far slower.
5. If it ever makes a profit we have no idea if it will ever have a strong moat.