Forget Anthem; Teladoc Health Is a Better Growth Stock

The U.S. healthcare consumer is under duress. America has some of the highest costs of care, with one estimate from the American Medical Association pegging average annual spending at $11,000 per person in 2017. Reasons for the steep bill are diverse and divisive, as are proposed solutions for the problem.

From an investment perspective, many health insurers have been doing just fine in the last few years, though. Anthem (ELV 0.15%) stock, for example, is up more than 100% over the last three years due to moderate revenue gains but even bigger gains to the bottom line. That's all well and good, but other companies out there are trying to do even more to keep healthcare affordable and convenient. One of them is Teladoc Health (TDOC -0.07%).

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What is telehealth?

Telehealth is the delivery of health services and advice via phone or video conference. It's the convergence of several technologies, including the expansion of better mobile networks, faster internet, and connected health enabled by digital transformation. Though not a perfect solution (a traditional visit with a healthcare provider can't be replaced if patients need physical treatment), telehealth helps expand access to primary care and specialists for those in need of consultation, and it helps keep costs down for care providers.

There's also the convenience factor. The last thing a sick person wants to do is make a trip to the doctor's office. Getting advice from home first often makes sense, especially for those who might need to make a longer trek to visit their healthcare professional. Industry size estimates vary, but annual global spending is likely somewhere south of $30 billion on telehealth services. Compared to the multitrillion-dollar figure spent in America alone every year on healthcare, suffice to say a few tens of billions each year is small potatoes.

All of these factors are combining for some big growth for telehealth, although those estimates vary widely as well. The average global spending could grow somewhere in the high teens -- some estimates are close to 20% -- for the next five years or so. A much faster rate for telehealth in the immediate future could bring annual telehealth industry spending to the doorstep of $100 billion a year.

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The leader in the emerging space

That's where Teladoc comes in, by far the leader in telehealth here in the U.S. and one of the only providers with a global presence (care delivery in 130 countries and in 30 languages). I've owned Teladoc for a couple of years now, and thus far it has been a rewarding journey. Its revenues increased 89% and 79% year over year in 2017 and 2018, respectively, and through the first six months of 2019, it has grown another 40%. Total patient visits with a Teladoc professional increased 73% in the first half of 2019 to 1.97 million.

A good portion of that expansion has been because of acquisitions -- like the merger with telehealth peer Best Doctors back in 2017 for total consideration of $440 million. But for the most part, this has been a story of new customer additions (Teladoc partners with healthcare providers like hospitals, insurance companies, and employers to offer access to its services) and an expanding lineup of services that now cover everything from primary care to pediatrics and mental health, to name just a few.

Why it's a buy

Teladoc is growing fast, but a bottom line full of red ink might scare away many investors. However, part of the losses are by design as the company reinvests its cash into itself to foster growth. That's important given that the business needs to be larger to reach sustainable profitable scale. Nevertheless, progress is being made, and while gross margins are down this year due to new service launches, an improving adjusted profitability figure (which excludes noncash expenses like stock-based compensation and depreciation) indicates the payoff will be there in the not-so-distant future.

Pp = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Teladoc Health.

So far, there are some subjective projections on future industry growth and backward-looking financial results from Teladoc showing top-line growth but steep losses. Does that really make the stock a buy?

As with nearly everything in investing, it's all about doing some due diligence, recognizing trends, and then diversifying. Teladoc certainly isn't perfect, but it's disrupting the status quo in healthcare and has a massive opportunity -- both here and abroad. This stock's story will take many years to develop, and along the way, it will continue to be a wild ride as it has been as indicated by the stock chart at the outset. It should be part of a well-diversified portfolio, and the best-case scenario is for investors to keep an initial position small and plan on adding to it incrementally over time.

Over the long haul, though, this looks like a far better option for investors looking for growth than the established health stocks out there like Anthem. If you have patience and don't mind some turbulence, Teladoc Health looks like a great healthcare stock for the future.