Teladoc Health (NYSE:TDOC) connects doctors with patients over video chats and phone calls -- so-called virtual visits. In this fast-growing market, the company is the largest player by revenue but it's still very much a battleground stock.

On one hand, Teladoc has immense growth potential. The company has increased its revenue by an order of magnitude over the past five years alone. On the other hand, the company's stock price is down over 20% from its 52-week high, and as much as one-third of its shares are held short. While the growth story is very apparent to those who have followed the company, it is worth touching upon three key risks that have led many investors to bet against the company.

1. Competition

While Teladoc operates in the fast-growing industry of telehealth, it is not the only operator. Today, Teladoc calls itself the largest telehealth company, but it has at least a few serious competitors. In its annual report, the company lists MDLive, American Well, and Grand Rounds among its foremost competitors.

Considering that Teladoc is the largest player and that none of the competitors mentioned has much name recognition, investors are probably not too worried about these players. However, investors are anxious about the potential for a larger tech company to enter the telehealth market and compete. Those fears were confirmed in September when Amazon dipped its toe into the telehealth market by announcing its Amazon Care initiative.

Amazon Care isn't an immediate threat to Teladoc. Right now it's only available to Amazon employees in the Seattle area and doesn't have the full suite of services that Teladoc offers. But the signal is clear: Other companies are interested in this market and may give Teladoc a run for its money at some point.

Doctor holding a lung X-ray

Image Source: Getty Images.

2. Lack of profits

Like many other fast-growing tech companies, Teladoc is firmly unprofitable. As the chart below shows, the company has generated a net loss for the last several years, and its net loss over the past 12 months exceeded $100 million, compared to a net loss of approximately $50 million in 2016. In other words, Teladoc has lost more money despite significant revenue growth.

TDOC Profit Margin (TTM) Chart

TDOC Profit Margin (TTM) data by YCharts.

Although the company has produced larger losses in dollar terms, the silver lining is that its net profit margin has improved. Back in 2016, Teladoc lost more than $0.70 for each dollar of revenue it generated. Over the past 12 months, the company has reported a profit margin of negative 22% -- a significant improvement.

Investors should expect Teladoc to continue to show improvements in its profit margin. As the company achieves greater scale, it will be able to more easily cover the fixed costs of its corporate overhead and technology development costs. In fact, the company noted that fixed cost operating leverage contributed to half a percentage point of margin improvement in the last quarter.

3. Expensive valuation

Another thing Teladoc has in common with other fast-growing tech stocks is an expensive valuation. Of course, valuation is a difficult thing to measure for Teladoc considering that it doesn't show any profits. Making matters even more difficult is that there are no other pure-play telehealth stocks in the market. The best we can do is measure Teladoc's valuation as a ratio of its enterprise value to revenue, and compare that to other healthcare technology stocks.

TDOC EV to Revenues (TTM) Chart

TDOC EV to Revenues (TTM) data by YCharts.

On an absolute basis, Teladoc's enterprise value-to-revenue ratio of 9.6 is quite rich but could be justified given the company's extremely high rate of growth. Taladoc is also expensive relative to the healthcare technology stocks Cerner and Vocera Communications, but these other companies are not growing nearly as fast as Teladoc and also do not operate directly in the telehealth industry. In other words, they may not be good comparisons to make.

Valuation tends to be more art than science, but in Teladoc's case, there's more creativity involved than usual. If Teladoc can continue growing at a healthy rate, then its valuation won't matter as much in the long run. For now, investors appear to be making the bet that Teladoc's sales growth is more important than its current valuation or profitability.

Factoring in the risks and rewards

There are many reasons to be bullish about Teladoc. The company is a pioneer in one of the fastest-growing segments of the healthcare industry. But investors shouldn't forget that there are always risks to keep in mind. The fast growth of the telehealth industry has attracted competition, and while Teladoc has shown impressive growth, it has yet to show profits or reach a cheap valuation.