Coffee Can I: Teladoc & Eventbrite
A Brief Update
Last week, I introduced the Coffee Can Portfolio. The idea of a Coffee Can is simple: You try to buy the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
The notion of a Coffee Can gels well with the investment approach I have spoken most about here: Investing In Mavericks. This is akin to "Venture Capital" investing, but in the Stock Market.
In short:
We are looking for companies poised to become the greatest companies of our time. Think, Amazon or Netflix in the early 2000s. Companies that, if they succeed, have the potential to 10X in 10 years or less.
This approach really comes down to envisioning what the world MAY be like in the future, and investing in companies who can make that proposition a reality. We want these companies to be run by visionary leaders, and we aim to own these stocks for very, very long periods of time.
Below is an update on the first Coffee Can portfolio I shared publicly (on November 28 2019). I will talk more about these (and others) in the coming weeks, months and beyond.
An Update on Eventbrite and Teladoc
Overall Performance:
A year in, overall, this has been a fantastic coffee can so far. I view these as 3-5 year holdings, minimum.
Stocks:
Today we’ll talk about the worst and best performers to date, namely Eventbrite (EB) and Teladoc (TDOC).
Eventbrite (Ticker: EB): You Can’t Sell Events If You Can't Go Outside!
Unfortunately, this stock has been a Covid-19 casualty. Here’s a timeline of what happened.
The good news is that ticket sales trends have shown an improvement from the mid-March low-point, however, adherence to social-distancing guidelines will likely constrain ticket sales. It’s unclear for how long...
Julia Hartz, the CEO said this during the Q1 earnings:
Looking ahead, we believe the COVID-19 crisis will accelerate change in the live events industry. We believe smaller local events that are core to our business will resume earlier, and we think they will happen more frequently to satisfy pent-up demand.
This remains to be seen. On the one hand, I am happy to see the company reaffirm its mission “To bring the world together through live experiences”, but I am disappointed that the company isn’t taking a more aggressive stance on “Online Live Events”, the key word being Online.
Eventbrite has a good financial position, and therefore this would be a great time for the company to invest in simplifying and enhancing online events. That’s what market leaders do, they invest when competitors aren’t. This could be done in many ways, including Product Innovation or Partnerships. I would love to see them make it easier to host more engaging online events (not passive webinars, but more engaging social experiences) and also partner with online meeting platforms.
This investment (so far) is an example of a Distraction, which I earlier described as the following: “Such investments are painful, but inevitable in this type of investing. This is the price Venture Capitalists pay to be able to invest in Homeruns. I call these Distractions because these are where VCs end up spending most of their time, doing damage control and trying to help the under-performing companies they have invested in.”
As public market investors however, we don’t have to do the latter, which is a huge advantage since we can spend that time looking for other investments instead. As I outlined before, “Over time such investments would become a smaller and smaller component of the portfolio, and as such, should take up less time and mental energy.”
In the future, we will likely go back to a world where humans once again gather together, as we have been doing for thousands of years. I do believe this will happen... but I don’t know when. If I had to guess, it’s sooner than most people think.
Lastly, looking at the price chart, we may have witnessed a capitulation, post Q1 earnings. Only time will confirm. For now I’m holding.
Teladoc (Ticker: TDOC): Telemedicine Is Starting To Cross The Chasm
Teladoc has been the complete opposite of Eventbrite in terms of stock market performance. It couldn’t have been a better performer. Each purchase doubled. One tripled at one point, all in less than a year.
On Telemedicine:
Teladoc is the global leader in Telemedicine. It is revolutionizing the Healthcare Delivery Model. It’s interesting that the Internet has brought so many industries online but Telehealth just seems to be getting started. Imagine what percentage of our doctors visits will be online 10 years from now...that’s the opportunity. Teladoc has the opportunity to define what Telehealth will look like, both in the hospital and in the home.
These days everyone is talking about the emergence of Remote Work, but I seldom hear anyone talk about Remote Health. But Covid has accelerated the adoption of Telemedicine. My sister, like many physicians, was forced to start seeing patients online because of shelters in place. This means many people experienced their very first online doctor’s visit last quarter, and I predict that citizens will prefer online visits when possible: it’s faster, more convenient, and you don’t have to sit in a waiting room filled with other sick people! This mindset shift may take time, but it has started, and should continue.
Telemedicine is starting to go mainstream, and there is no going back. Insurers are onboard. Hospital Systems are onboard. And this is a no-brainer for patients. The good news is that the market uncertainty is now gone. Teladoc therefore controls its own destiny. It must now focus on maintaining its lead. When I look forward 10 years, I think innovation in Telemedicine will continue to accelerate. As the leader, Teledoc is well positioned to meet the demands of this coming growth.
On The Growth Opportunity:
Zooming in a bit, Teladoc experienced 41% year of year revenue growth in Q1 to $180 million. Total visits increased a whopping 92%, but to just 2 million. Note, that more than 60% of Teladoc’s current visits are with members that are new to the platform. Future growth in patient visits is really what an investment in TDOC is all about.
Just like Visa & Mastercard are a tax on consumption, Verisign a tax on Internet growth, and Moody’s on Corporate Debt, Teladoc has the potential to be a tax on Telemedicine.
Here is a history of the annual Teladoc virtual visits over the past few years. We can clearly see the exponential growth starting to take place.
The company expects 8-9 million visits in 2020 (the 2020E number in the chart above is slightly dated). I don’t really care whether Teladoc hits their number this year. But what’s obvious is that the number of visits can easily 5X (probably 10X since I am usually biased towards under-estimation) from here.
At scale, with just a 10% market share for the US population, with just 2 visits per person, gets us to 66 million visits per year. Sure, this may be an oversimplification, but directionally it’s right. We also haven’t accounted for any of the following:
International Visits:
This in itself is huge and likely a source of growth for the next decade or more. Today it represents < 20% of revenues.
New Markets:
For example, Tele-Nutrition is a new vertical for TDOC, something I had not even considered before.
Any Unforeseen Innovation:
This is optionality you can’t really predict, nor price. We don’t know how healthcare payments might evolve over time? We don’t know what ancillary markets (eg: remote monitoring) might form? We don’t know how other health services might integrate with Telehealth (eg: health records) and what new experiences this may enable? But Telehealth will likely be in the middle of all of the above.
Oh, and by the way, in 2017, Teladoc had 75% market share, nowhere near just 10%! Ok ok…that isn’t a fair apples to apples comparison to the 10% number above... but the numbers are so big, we don’t need to be super precise.
Lastly, the company believes 400 million annual doctor visits can be eligible for Telehealth. If reality is anywhere close to this, we’re aiming for just 2% market penetration this year.
On Competition:
In short, it doesn’t matter.
Frankly, the biggest obstacle Teladoc has faced in their almost 20 year history (yes, they’ve been around since 2002!) is regulation. The company reminds me a lot of Uber in how they have overcome several dated regulations and the “status quo”, that is, the requirement that physicians must physically meet patients before remotely administering treatment or prescriptions. They have endured a difficult regulatory environment for a long time. This has built resiliency in the business. With regulations easing, and insurers now covering Tele-visits, I believe Teladoc now controls its own destiny. That’s all you can ask for from an emerging Maverick.
To be clear, yes, there is obviously competition, but they’re private so it’s hard to know where they stand. When I have spoken to doctors, Teladoc is the brand that comes up most in conversation. Even if a strong competitor emerges, the market is likely to end up as an oligopoly. I am not convinced of a winner-take all dynamic here (Let me know if you think otherwise!). So there is plenty of room for multiple winners here. Teladoc just needs to be one of these and it’s already in the lead.
Some Concerns:
I’m torn about the company culture. After speaking with a few people at the company, I came away a little let down. A big reason that Teladoc has been so successful to date is their mission-orientedness. They wouldn’t have survived otherwise. Unfortunately, I didn’t see this passion in the people I spoke with. I’ve also heard of not so great candidate interviewing experiences at the company, and I wonder how seriously they take their talent acquisition. Enduring a good culture is important so this is something to further educate myself on…Let me know if you have any insights about this!
Lastly, I do want to say that for a relatively small company, they have been quite acquisitive, which I don’t like. Perhaps I am being too critical? Onboarding a telemedicine provider is a massive investment (and a long term one) for both benefit plans and hospital systems. Once these systems are in place, Teladoc will likely have ample revenue-generating and expansion opportunities with their extremely sticky customer base. But for now, we’re clearly in the land-grab phase of the market, and acquisitions help TDOC get to scale faster. Their stock is likely a good selling point for their acquisition targets as well. Nonetheless, this is another thing to keep an eye on.
In Summary:
Wrapping up, there isn’t much not to like here. I’m still an owner. In fact, this is one of the stocks I selected for our Stock Market Contest. Hope you signed up! More on that to come later.
Keep Reading:
More on Teladoc — Zocdoc: A Credible Teladoc Competitor?
Coffee Can 1: A Recap — Discussion of the remaining companies in Coffee Can 1
If you enjoyed my update on Teladoc & Eventbrite, subscribe!
Next time, I’ll share brief updates on Baozun, Etsy, MongoDB, and the Trade Desk, the remaining stocks in Coffee Can 1.
Also more Coffee Cans coming soon.