One key to successful investing is holding on to shares of exciting businesses even when things aren't going well for them. However, company-specific headwinds can last weeks, months, or even years, making investors wonder whether things will get better or if it's best to cut their losses.
Many are pondering that question in regards to Teladoc Health (TDOC 0.47%). Shares of the telemedicine specialist have been heading lower since early 2021. Does the company have what it takes to bounce back?
What happened to Teladoc?
One of Teladoc's problems is that the company's top-line growth has slowed considerably compared to the pandemic and pre-COVID-19 days.
That's bad enough as it is, but to make matters worse, Teladoc still isn't profitable. Some investors are likely having trouble reconciling investing in a company that isn't growing as fast and still shows red on the bottom line, but it's important to understand the context of these trends.
TDOC Revenue (Quarterly YoY Growth) data by YCharts
First, the pandemic significantly accelerated the adoption of Teladoc's offerings. The company might not have achieved the revenue and the number of clients it has for several more years if not for the highly unusual circumstances we experienced in recent years.
There is no question that telemedicine is incredibly convenient. Patients can receive basic consultations from the comfort of their homes. Still, no matter how great the service is, people had little choice but to use it during the pandemic. It makes sense that at least a non-negligible percentage of patients would substantially decrease their telemedicine usage as things returned to some semblance of normalcy.
Still, between 2019 and 2023, Teladoc's annual revenue increased at a compound annual growth rate of 47.3%. And even if the company's sales growth continues to be sluggish for a couple more years, zooming out further could paint a very different picture.
The path forward
Teladoc will need to rely on organic growth -- that is, attracting clients for reasons other than a global outbreak -- from here on out. It will also have to turn a profit sooner rather than later to get back in investors' good graces. The positive news is that there are solid reasons to believe the company can make progress on both fronts. Even pandemic disruptions aside, analysts predict the telemedicine market will continue expanding. So there should be plenty of growth opportunities for Teladoc to pounce on.
The company is building a network effect. Since it is creating a vast network of patients, individuals, institutions, and physicians, its platform is increasingly attractive from the outside looking in. Patients will want to join a network that already boasts a large number of physicians across multiple specialties and vice versa. Teladoc has more than 90 million members and 40,000 clinicians.
Meanwhile, Teladoc has been improving its bottom line. Last year, its net loss of $1.34 per share was far better than the previous year's $84.60. Even if we take into account the fact that 2022 was an unusual year -- with Teladoc having to report significant, acquisition-related non-cash impairment charges -- the company improved even compared to 2021, when its net loss per share was $2.73. Furthermore, Teladoc's gross margin remains strong.
TDOC Gross Profit Margin data by YCharts
Why, then, does the company remain unprofitable? It is still spending a lot on marketing and advertising costs. As it grows in prominence, that should change. It won't happen overnight, but in my view, Teladoc's prospects aren't nearly as bad as the market seems to think. Those who invest in the company today might be glad they did down the road.
