Teladoc Health (TDOC -1.58%) has been one of the best healthcare investments in the years since its IPO i n the summer of 2015. Shares are up 240% since their public debut as the connected-health movement -- care delivered virtually instead of in-person -- has started to take off. An early pioneer of virtual care tech, the company has begun consolidating the nascent industry by acquiring several of its peers.
The stock is off to a hot start in 2020, too, thanks in large part to the announcement that Teladoc is taking over integrated virtual care provider InTouch Health. Shares surged nearly 15% higher after the news on optimism that the company will be able to maintain its growth rate for the foreseeable future. As it's still in the early innings of the movement, Teladoc is a buy for the long haul.
Why InTouch makes sense
Teladoc already provides dozens of direct-to-consumer and organizational solutions, covering a wide range of disciplines from basic consulting to mental health to specialized services. The company provides virtual visits for patients as well as connected health services for insurance providers and employers.
InTouch helps expand on that know-how. Its platform combines software and purpose-built hardware to help hospitals offer connected services to patients and integrates with other parts of a hospital's digital operation. Thus, adding InTouch will help Teladoc expand in a new related direction, as well as stay a step ahead of new entrants into the space. InTouch has partnered with 450 hospitals and is expected to have generated $85 million in revenue during 2019, a 35% increase from the year prior. That compares with $397 million in revenue and 34% growth for Teladoc through the first nine months in 2019 reported so far.
The price tag for the takeover? $600 million, which puts a steep price-to-sales ratio of 7.1 on InHealth, although that's far lower than the 13.2 times trailing-12-month sales Teladoc's stock currently commands. The $600 million will be paid for with $150 million in cash (Teladoc had $475 million on the books at the end of Q3 2019) and $450 million in stock (its market cap is currently just under $7 billion, so it doesn't excessively dilute shareholders).
Ignore the short term; buy for the next decade
This explains the excitement among investors the day the deal was announced. If InTouch can maintain its momentum as part of the Teladoc family, the acquisition should be a favorable one. However, though the double-digit bump was nice, investors need not fret about what shares trade for right now. This should be a purchase for the long haul.
According to InTouch, global telehealth has been growing at an average 25% a year clip in each of the last five years, and it reached a value of $40 billion in 2019. Those sound like big numbers, but bear in mind that spending on healthcare is over $3.5 trillion every year in the U.S. alone. Telehealth is only just getting started, and the spread of consumer high-speed internet connectivity paired with new technologies such as AI means digitally enabled healthcare services should only continue rising in importance.
Teladoc is a leader in the field, and it's my favorite stock for betting on the virtual delivery of patient care. While shares aren't as cheap as they were prior to the takeover of InTouch, the increase in value looks like a simple upward adjustment in value for the inclusion of the new business, and such a jump is irrelevant when looking at the potential for the industry (and the company) in the decade ahead. In a fragmented healthcare industry marked by soaring consumer costs, Teladoc still looks like a stock -- and an agent of positive change -- worth betting on.