September has been a busy month for Amazon (NASDAQ:AMZN). The tech and retail giant announced a slew of new smart home and consumer electronics hardware at its autumn unveiling event this week as well as a new long-range wireless protocol to connect devices called Sidewalk. Perhaps the biggest move -- at least as measured by total industry size -- was the announcement of Amazon Care, the company's long-awaited move into the multitrillion-dollar healthcare industry.
This was not a surprise announcement. Amazon launched a joint venture with Berkshire Hathaway (NYSE: BRK-A) (NYSE:BRK-B) and JPMorgan Chase (NYSE:JPM) last year, called Haven, aimed at lowering healthcare costs for employees. Haven apparently isn't affiliated with Amazon Care at this point, as it is just being offered to Amazon employees around the Seattle area for now. Nevertheless, the risk of a heavy-hitting entrant into the world of remote healthcare services sent shares of Teladoc Health (NYSE:TDOC) into a brief tumble before eventually rebounding. Amazon isn't a direct competitor yet, but it could be -- leading many investors to wonder about the fate of Teladoc.
There will be a lot of moving parts to watch, but here's the upside for Teladoc: It is no old and stodgy company ripe for disruption.
Why Teladoc might be concerned
Here are the details that might be worrisome. Teladoc is far and away the leader in the U.S. in the emerging telehealth industry -- doctor visits and health consultations delivered by phone or remote internet connection. When Amazon said it was going to get into the health business, it was assumed that telehealth would be the direction, combining a physical clinic with the ability to chat with a physician via text or online video. Using its Pillpack prescription service acquisition from last year, patients will also be able to skip the pharmacy visit. That's a one-up on Teladoc, which doesn't have its own in-house prescription fulfillment business.
Amazon Care is starting small and will get tested out by Seattle-based Amazon employees, but it's likely -- almost certain -- that this thing will get bigger in time. If it starts to grow beyond Amazon's team, eventually finding its way into Berkshire Hathaway or JPMorgan Chase's sprawling businesses and beyond, it could start to step on the toes of Teladoc.
For its part, Teladoc works primarily with insurance providers and employers to offer telehealth services as part of their healthcare plans. It had 26.8 million paying members in the U.S. at the end of the second quarter of 2019 -- not to mention many more internationally.
Amazon Care could quickly become a viable competitor in this space because it has deep pockets to invest what it takes. That would suggest Teladoc should be concerned.
Why Teladoc might be a big winner
Surprisingly, Amazon elevating the profile of telehealth technology could actually be a good thing. After all, 26.8 million paying members is a big number, but it represents less than 10% of the nearly 330 million people living in the U.S. who form Teledoc's potential market. Mass adoption of remote healthcare hasn't happened yet, and awareness of such a service even existing could spur on greater adoption for Teladoc as well as an eventual national rollout of Amazon Care. Fear of the unknown can be a powerful tool, too, and insurers and healthcare providers could eye Amazon Care as a potential competitor and decide to try and front-run the disruption by joining Teladoc's platform. Thus, this could be a network effect that expands beyond Amazon's borders and boosts its biggest peer as well.
It's not like Teladoc is this old incumbent trying to fend off the tide of change. The company is itself a disruptor, championing the convenience, increased access to care, and cost savings of utilizing communications connectivity. The company is growing fast. Revenue was up 40% year over year through the first six months of 2019, and the number of patient visits grew 73%. Put simply, this is not the same story as Amazon upsetting the status quo with online retail and superior logistics. Just as Amazon's rise has helped float other e-commerce companies, its entrance into telehealth could possibly do the same for Teladoc.
There's also the off chance that, after a trial run with Amazon Care, Amazon decides to just acquire Teladoc. It's possible, as Teladoc is still a small company currently carrying a market cap of $4.9 billion. But I'm inclined to not think that will happen, given the current regulatory environment. Amazon and other tech giants are coming under increased scrutiny by government entities for alleged anti-competitive practices. A high-profile purchase in an industry already waiting for a flashpoint might create unwanted attention. Despite the polarized political situation these days, there is bipartisan agreement that healthcare is in need of some sort of big shakeup. Perhaps Amazon will take advantage of that desire and buy Teledoc.
At the end of the day, the direction Amazon Care heads as it ramps up operations could possibly create some serious headaches for Teladoc's nascent business. But for now, Teladoc is still the leader in an emerging growth industry. Stay tuned.