Teladoc (NYSE: TDOC) has had rapid growth in 2020 as COVID-19 acted as a catalyst in the growing telehealth space. Its recent merger with Livongo firmly established itself as the leader in the space. The recent news that Amazon is entering the market should come as no great surprise but should investors be worried?
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The market opportunity:
Most investors will be aware of the massive opportunity in the telehealth space and beyond, and the rising competition is in large part due to this. The healthcare industry has been mostly untouched by technological advances along with high costs and inefficiency, which leaves it ripe for disruption. Teladoc estimates that the telehealth space will grow at a compound annual growth rate (CAGR) of 38% over the next five years. It also estimates that $250 billion in healthcare spending could be virtualized. The sheer size of the market opportunity means that it is unlikely to be a “winner takes all” scenario.
What is Amazon offering?
Anybody who has been keeping an eye on the healthcare space will be aware of Amazon’s intentions. In 2018, Amazon acquired PillPack for $753 million to get into the online prescription market and in recent months rolled out Amazon pharmacy. In 2019, Amazon started Amazon Care which is available to its employees in Washington state only. Amazon Care provides both virtual and in-person care with a mobile app that facilitates remote video chat with physicians. Follow-up visits and prescription delivery are also offered through this service. The latest news is the plan to expand Amazon Care to other employers. However, it remains unclear how far this expansion will go, given that it is only available in a small area with limited providers.
Amazon has undoubtedly disrupted many industries such as brick-and-mortar retail, but investors shouldn’t jump to conclusions that Amazon will automatically dominate any space that it enters. A prime example is back in 2015 when Amazon launched Amazon Handmade in a bid to compete with Etsy, causing the stock to sell-off. This is similar to the reaction in Teladoc stock. However, Etsy has thrived in the face of competition and this scenario is a lesson to investors not to panic or sell based on news.
Livongo merger-an added dimension
The recent merger between Livongo and Teladoc has increased Teladoc’s total addressable market to $121 billion and strengthened its position. It has a successful history of acquisitions, and one can look at InTouch, which was a huge success. While Teladoc is primarily focused on telehealth which Amazon is targeting, Livongo has brought a whole suite of products to help manage chronic conditions. There is also minimal overlap in customers between Livongo and Teladoc and the combined entity is forecast to have $500 million in run-rate revenue synergies by 2025.
A large volume of visits is now from non-infectious diseases, such as diabetes and hypertension, which currently makes up 55% of total visits compared to roughly one-third a year ago. There has been sustained demand for Teladoc’s services even where COVID-19 cases have subsided and have “accelerated the market by 4 or 5 years” according to CEO Jason Gorevic.
From a financial perspective, Teladoc is firing on all cylinders with Q3 revenue growing by 109% to $288.8 million with a gross margin of 60% and total visits increasing by 206% to 2.8 million. Teladoc’s offering is extremely sticky, with retention rates of over 90%. It also raised its full-year revenue guidance to over $1 billion.
The recent news that Amazon is entering the market shouldn’t worry Teladoc shareholders. This should be seen as a validation of the growth in the industry and Teladoc should continue to cement its position as the leader in the space. Often the best thing for investors to do is remain patient and don’t react to the news. Teladoc should compound and reward shareholders for many years to come despite the competition.
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