After Teledoc Health (NYSE:TDOC) merged with Livongo last year, the stock underperformed. And now, after a brief surge in early 2021, TDOC stock is stuck in a narrow trading range at between $120-$150. Shares are in a holding pattern because markets are weighing the ongoing risks associated with the aggressive Livongo merger. The whole-person virtual care leader completed its merger on Oct. 30, 2020.

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While markets fret over high integration costs, TDOC shares are trading sharply below 52-week highs. And investors who believe in the merger and Teledoc’s vision of creating a new kind of healthcare experience may bet on its prospects while shares are discounted.

TDOC Stock Prospects

In 2014, Teledoc entered a strategic alliance with the Blue Cross and Blue Shield Association’s National Labor Office, and last year, the contract expanded as Blue Cross Blue Shield made the telemedicine coverage permanent. This, plus many other contracts, should add to Teledoc’s bottom line in the next year.

Investors looking for a quick turnaround in the business and TDOC’s stock price will probably be disappointed. But over time, the telemedicine model has plenty of room to grow.

The trouble is that Teledoc shares took off for a few months in the summer during the pandemic and ensuing lockdown, but that rally did not last. By February, the stock fell. Telemedicine prospects should have accelerated after the pandemic, pushing Teledoc’s growth higher. For example, the firm posted second-quarter revenue of $503 million, up 109% Y/Y. The growth includes Livongo’s results.

In Q2, net loss was $133.8 million, up sharply from a $25.7 million loss last year. The company booked high stock-based compensation expenses of $83 million in Q2. For the first half of 2021, that expense totaled $169.3 million. Furthermore, Teledoc reported amortization of acquired intangibles of $46.1 million.

Teledoc recorded a loss on the extinguishment of debt of $31.4 million. Without any debt, the firm need not worry about the risks of higher interest rates.

Opportunity for TDOC Stock

Teledoc has a first-mover advantage in the telemedicine space. It acquired Livongo to add diabetes monitoring and remote monitoring. The price of $18.5 billion in cash and stock is troubling investors. Still, Teledoc could grow revenue by 30% to 40% over the next two to three years.

In a five-year discounted cash flow revenue exit model, readers may assume a discount rate of around 6%. This would suit Teledoc and Livongo since the firms demonstrated strong historical revenue momentum.

Model courtesy of finbox

The bad news is that at a bullish revenue multiple, TDOC stock is trading at close to fair value. Teledoc needs revenue to grow by 40% annually sooner. That would imply a higher fair value and considerably better returns for investors.

Model courtesy of finbox

On Wall Street, 19 analysts offer mostly buy ratings on Teledoc. According to Tipranks, the price target ranges from $135 to $260 and the average price target is around $182.

Risks of Acquiring TDOC Stock

Teledoc posted quarterly losses that the markets did not expect. It may post wider losses for the rest of this year and in 2022 but, this will depend on expenses related to the Livongo merger.

Investors will lose patience with Teledoc’s profit growth promises. That would trigger a sell-off in the stock and higher costs will pressure operating margins.

Conversely, shareholders should welcome Teledoc in increasing its spending on sales, technology, and marketing. This increase should happen not only for this quarter but also throughout 2022. It needs to build its brand and acquire more customers. The more advertisements it pushes, the sooner the customer growth adds meaningfully to total revenue. Teledoc will achieve higher profits sooner than the market expects.

Unexpectedly, high stock-based compensation is an ongoing risk since TDOC accounted for those costs last quarter; investors should not expect those costs until next year.

Your Takeaway

Teledoc is an out-of-favor growth stock. The health information services firm has lots of work ahead to accelerate its expansion. It must strengthen its brand recognition through advertising. It needs to find synergies with the Livongo merger, reduce operating costs, and invest in technology and operations to increase efficiencies.

Shareholders will need to have a holding period of at least a year, as Teledoc will need that time to prove itself. A holding period of two or three years is more realistic, since that will give management the time it needs to maximize the returns on the big Livongo merger.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns