Amazon.com (NASDAQ:AMZN) has taken down so many businesses in the consumer goods sector that just poking its head into the smaller healthcare arena should be enough to make anyone nervous. Amazon's latest healthcare sector bomb landed in the growing market for telemedicine services.
The retail goliath's new pilot program, called Amazon Care, will be limited to Amazon employees in and near Seattle, but fear of competition still led Teledoc Health (NYSE:TDOC) shares around 6% lower within hours of the announcement.
Just how frightened should Teledoc shareholders and other healthcare investors be at the moment? Here's what you need to know.
Amazon finally launched Amazon Care, a virtual health clinic that combines telemedicine with in-person services and pharmaceutical sales. Through the Amazon Care app, patients can text chat with a nurse in minutes, or set up an in-app video visit with a doctor or nurse practitioner. If an in-person exam or a vial of blood is necessary, the program employs mobile nurses who will visit the patient at home or the office.
Last January, Amazon bought a prescription drug delivery business called PillPack that will probably play an important role in Amazon Care. That's because the service also includes prescription drug delivery, so employees can handle all aspects of a doctor visit without leaving their homes or offices.
Who gets Amazon Care?
If Amazon Care sounds like the way you'd like to handle your everyday primary care needs, you're going to be disappointed. Currently, the service is available only to Amazon employees in the Seattle area, with plans to expand to the rest of the company's workforce, perhaps in 2020.
Amazon has around 647,500 full- and part-time employees in total, around 53,000 of whom work in the Seattle area. During the pilot phase, only Seattle employees and their families will participate in Amazon Care, but further expansion seems likely.
Who will get Amazon Care next?
Amazon Care could make Prime subscriptions a lot stickier, but it's probably going to remain more exclusive than the company's flagship subscription service. Amazon is known for letting its own employees work out all the kinks with new services before they're offered to valued customers.
With Amazon Care, though, the company could have a much larger test population than usual. In early 2018, Amazon joined forces with Berkshire Hathaway and JPMorgan Chase to create a group venture called Haven tasked with lowering healthcare costs for the companies' U.S. employees.
The Amazon Care website doesn't mention the Haven venture, but we can reasonably expect Berkshire Hathaway and JPMorgan Chase to pile in if the pilot program succeeds. After all, Haven was formed with the goal of reducing the cost of care for a combined 1.2 million employees and their families, not just for Amazon.
Competitors or partners?
If Amazon, Berkshire Hathaway, and JPMorgan Chase want to expand Amazon Care to all their employees before they're old enough to retire, Amazon will need to employ more doctors than it can probably find on its own.
At the beginning of 2019, Teledoc Health's Expert Panel already employed around 50,000 medical experts across 450 different specialties. Whether these same Teledoc providers will also work for Amazon Care -- like an Uber driver who signs up for a Lyft account -- is hard to predict because we're in some uncharted waters. At the moment, though, it looks like partnering with Teledoc will be the easier route.
Teledoc Health has grown into the largest U.S. provider of telehealth services by acquisition, and you shouldn't be surprised if Amazon follows suit and simply buys Teledoc rather than playing catch-up. At recent prices, purchasing Teledoc at a 50% premium would still leave around $15 billion in cash on Amazon's balance sheet.
Time to buy Teledoc?
Teledoc facilitated 5.9 million visits in 2018 and will probably handle 9.8 million in 2019 as clients and their employees grow more accustomed to the service. Teledoc is still losing money in terms of net income, but adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to reach between $27 million and $33 million this year.
At recent prices, Teledoc has been trading at around 9.8 times trailing sales. That's far above average for other types of healthcare providers, but most healthcare providers aren't growing nearly as fast as Teledoc Health has been.
Teledoc's already beginning to produce profits with an operation built for scale, and by the time Amazon presents any kind of direct competition, it will be entrenched in the minds of consumers who are catching on fast. Teledoc's dominant position in this growing space is an advantage that America's largest retailer probably doesn't want to go up against. That also makes it a great stock to buy now and hold onto for the long run.