Editor’s note: This column is part of our Best Stocks for 2019 contest. Jason Moser’s pick for the contest is Teladoc Health (NASDAQ:TDOC).
Two things I know for sure: The internet is the ultimate disruptor of my lifetime (at least so far) and the doctor’s office visit is one of the most inefficient and time-consuming processes on the face of the planet. Thankfully, virtual healthcare provider Teladoc Health (NASDAQ:TDOC) is leveraging medical expertise to impact consumers around the world and offer them more options in a market which seems mired in red tape.
While the concept of telehealth is still new to many, it is being seen more and more as an excellent option in many cases and the investments Teladoc is making in its business today could pay off big down the road as telehealth becomes a more meaningful part of the overall healthcare industry. And as someone who has used Teladoc’s services before I see massive potential.
There’s a Lot to Like in TDOC Stock
How They Make Their Money: Teladoc is still a relatively young company but it’s certainly growing — and in more ways than one. The majority of revenue comes from clients (employers and health plans) on a contractually recurring, per-member-per-month, subscription access fee basis. In addition, they also generate revenue on a per-telehealth-visit basis, through a visit fee.
You can see from the chart below that not only is revenue growing at a healthy clip but membership and visits are growing at impressive rates as well.
Large and Growing Market Opportunities: Between ambulatory care, behavioral health management and the expert opinion market, management estimates Teladoc’s TAM (total addressable market) at around $57 billion today.
After a substantial trial period CVS Health (NYSE:CVS) recently announced that it will partner with Teladoc Health to offer round-the-clock care for non-urgent issues through its mHealth app. It’s also worth noting that this was not a relationship forged overnight but rather one that dates back to 2016 as both companies began assessing the market for telemedicine services. During these trials, company survey found that 95% of patients were “highly satisfied” with the quality of care they received in a telehealth visit, as well as with the convenience of using the telehealth service and the overall telehealth experience.
A Growing Competitive Advantage: Teladoc Health is the pure-play telehealth provider in the market today. While it is still a young business, its first-mover advantage is helping build a considerable network of providers and services offered along with navigating and helping to shape an ever-changing regulatory environment.
Management believes that it’s the size and complex capabilities of this network that give the company its competitive advantage and I agree. What they are building out is not easy to replicate, and as a first-mover in the space, they continue to separate themselves from other competitors.
Things to Keep an Eye on
Regulations: One of the biggest challenges Teladoc its and competitors have faced since inception is in the form of regulatory barriers. Actually providing healthcare via the internet was seen as almost impossible due to the nature of the market; the general view for many was that you had to be seen by a doctor in person. This myopic viewpoint though is being put to rest as the regulatory environment is clearing the way for telemedicine to aid in one of the industry’s biggest challenges: scaling healthcare. In fact all 50 states now have legislation on the books that allows patients to engage with physicians via telehealth without a prior in-person interaction.
Competition: Teladoc Health isn’t the only game in town. There are plenty of smaller providers trying to gain share as well as larger providers that are trying to build out their own telemedicine offerings. But it’s also worth noting that healthcare is a massive market opportunity and there will be multiple winners in the space.
Malpractice: Whether on your smartphone or in person, malpractice is a part of the healthcare industry and Teladoc Health will need to keep a close eye on the providers in its network to make sure they are offering up responsible diagnoses and treatment plans. It’s also important to remember that telemedicine isn’t meant to replace doctors in physical locations. Rather it’s meant to make our current healthcare system better and more efficient. You probably shouldn’t be attempting to use telemedicine if you think you’re having a heart attack (seriously just call 911). But if you’ve got a case of pink eye it may just be all you need.
Where Does This Road Take Us in Teladoc?
Sticking a valuation on Teladoc Health today is likely an exercise in futility given that it’s still a young and unprofitable business. But we can look to some clues to give us an idea of its potential. At 10 times sales today I’m not going to argue that the business is cheap (or expensive). But consensus estimates peg revenue crossing over the $1 billion mark by 2022 with a target EBITDA margin in the 20% range.
Certainly the market is pricing in some of that optimism today, but it’s also fair to assume that Teladoc Health will be an even more comprehensive and global offering by 2022 as well. For example, the Center for Medicare and Medicaid Services just published rules which will allow Medicare Advantage plans to include telehealth as part of their bids for the 2020 plan year. This means that TDOC will be able to offer its full suite of services for 21 million additional enrollees.
And with its net cash position on the balance sheet Teladoc Health is in good fiscal shape.
The Bottom Line
Healthcare represents a massive market opportunity for investors, and thanks to technology telemedicine has made the leap from pie-in-the-sky to front-and-center. As a first-mover in the space, TDOC stock is giving investors the chance to participate in the future of medicine. While there are sure to be some bumps and bruises along the way patient investors will likely feel fit as a fiddle for years to come with Teladoc Health in their portfolio.
As of this writing, Jason Moser, a senior analyst with The Motley Fool, held shares of TDOC.