Will Teladoc Thrive In A Post COVID-19 World Or Fall Away For Investors?

Teladoc (NYSE: TDOC) has seen immense growth in recent months, and this has been reflected in the share price, which has more than doubled year-to-date. It is undeniable the value proposition that Teladoc has provided so far this year with over 2.8 million virtual visits, but will this growth be sustainable or will people return to their old ways?

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The market opportunity

Teladoc operates in the healthcare space, which is ripe for disruption due to high costs and inefficiencies. It is also an industry that has been largely untouched despite advances in technology, and there has been a lack of disruptors in the space. Teladoc aims to change this through its range of products from virtual healthcare visits to the management of chronic conditions. Teladoc estimates that the telehealth market will grow at a CAGR (compound annual growth rate) of 38% and that Livongo and Teladoc have a total addressable market (TAM) of $121 billion in the U.S. alone. Even taking these figures with a healthy dose of skepticism, there is a colossal TAM to be exploited. 

Financials

In Q3 of 2020 Teladoc revenue grew by 109% year-over-year (YoY) to a record of $289 million. This growth was driven by momentum due to the ongoing pandemic and increased adoption by customers. It also has gross margins in the 60% range which are very good despite decreasing slightly from the year prior. Teladoc also raised its full-year revenue guidance to over $1 billion. The Livongo merger is forecast to create $500 million in synergies by 2025, and this merger has allowed expanding relationships with the company’s closing its first cross-sale in Q3. 

Has COVID-19 created a lasting shift in telehealth?

Management believes that the growth due to COVID-19 is not a short-term phenomenon but more an acceleration of an existing trend. In a recent presentation, CEO Jason Gorevic stated that the pandemic has “accelerated the market by probably four or five years”. COVID-19 has also led to a decline in cold and flu cases, so if the virus is eradicated there will most likely be an uptick in telehealth usage for cold and flu. There has also been sustained demand in areas that are not COVID-19 hotspots which is promising.

The Livongo merger adds another dimension to what Teladoc has brought before. Although this merger caused a slight sell-off, Teladoc has a history of growth through acquisition. It executed the acquisition of InTouch, which provides telemedicine to hospitals and health systems. Due to the Livongo merger, Teladoc now gets a large volume of visits 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. With an aging population and increasing numbers suffering from chronic illnesses, this market will continue to expand. 

Teladoc has also given revenue guidance of 30%-40% for 2021, which is a slowdown from this year but is still significant growth and suggests that COVID-19 has created a lasting shift to telehealth. This growth, coupled with a retention rate in the 90% range and a large TAM would indicate that there is a long and prosperous road ahead for Teladoc.

Bear Case:

The worst-case scenario is that when the pandemic comes to an end, the majority of people will return to in-person visits which would hurt Teladoc’s business. Although this is unlikely and management continues to forecast sustained demand and revenue growth, it remains a possibility. 

Another risk is that despite the history of executing effectively Teladoc will fail to do this with the Livongo merger. The early signs suggest otherwise, but there is still a long road ahead where there may be pitfalls. Despite currently being the market leader, smaller competitors such as Amwell will also compete with Teladoc for market share. 

Both companies were unprofitable before the merger, and this remains the case. In Q3 Teladoc reported a net loss of $35.9 million which widened from $20.3 million the year prior due to $16 million in costs related to the merger. It also had $100 million more debt than cash on the balance sheet. The company remains in growth mode, but the question of its ability to turn a profit will persist and is worth noting. 

Overall, Teladoc is the clear market leader and appears to be in a stronger position than ever to grow and create shareholder value. However, investors should keep in mind the risks before investing.

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