As the COVID-19 pandemic keeps people home, the demand for virtual care services appears to be on the rise. And one company that's benefited from that is Teladoc Health (TDOC -3.35%). The New York-based healthcare company's been a hot investment this year, with its share price surging 160% so far in 2020 -- well above the near-flat returns the S&P 500 has produced thus far.
While it's tempting to jump aboard the bandwagon, there's one big reason long-term investors should think twice before buying in, and it has nothing to do with valuation. It's the company's lack of moat.
Competition could be a problem for Teladoc
Moat is something Warren Buffett fans are familiar with: It refers to a company's ability to hold a competitive advantage over its peers. The billionaire investor values companies that enjoy a large moat, because it means they'll be able to ward off competitors.
In Teladoc's case, there's not much moat there -- and that could make competition a worry for investors in the years ahead, especially as telehealth and virtual care services grow in popularity. Connecting physicians to patients remotely can be as easy as using Skype or Zoom.
Teladoc's low-cost Everyday Care costs $75 for people without insurance to access a doctor and even less if an insurance provider picks up a portion of the tab. One of the company's main competitors, Amwell, offers urgent care visits for $79. And patients who want a yearly subscription can sign up with One Medical (ONEM -0.06%), which for $199 annually offers access to physicians via video and the ability to book in-person appointments at more than 85 locations across the country.
Every industry has competitors, but as telehealth and virtual care services become more popular amid the COVID-19 pandemic, even more could join in. Right now, Teladoc remains on the rise; on April 29, Teladoc reported year-over-year sales growth of 41%. There was also a 92% increase in visits, and memberships rose by 61%. High growth numbers like that could raise eyebrows and attract companies from other industries like the tech sector.
Could big tech take over?
Tech giant Amazon (AMZN -1.57%) announced this month that some of its fulfillment centers would be getting healthcare centers as it partners with Crossover Health. It's a pilot program that will involve setting up 20 centers in five states, and more could be on the way if it's successful. With the company's technical resources and capabilities, enabling these offices to offer virtual care wouldn't be too much of a stretch. And while the service is currently only for Amazon employees, it's just the latest sign of big tech showing an interest in the industry.
Why should investors care?
If a company lacks a moat, it'll likely need to compete on price. That should be a big concern for Teladoc investors, given that the company's been in the red every year. With more competition, its sales growth could taper off quickly, and the company may need to invest more in generating revenue. That means that not only would its top line slow down, but its expenses would accelerate, leading to a net negative impact on the bottom line that could put Teladoc even deeper in the red.
And without strong sales numbers, investors will be left looking at profits -- which could quickly make Teladoc an undesirable investment to hold.
Should investors sell their Teladoc shares?
A lack of moat is one reason to sell Teladoc, and the company's astronomical valuation is another. With no profits and shares trading at 25 times revenue, the company carries a hefty premium for investors who buy the stock today. Even though Teladoc is likely to continue growing at a good rate for the foreseeable future, long-term investors need to be aware of the risk of holding on to the healthcare stock for too long.
Things can change quickly in the world of tech, and five years from now the company may be battling for market share with tech giants like Alphabet and Amazon. Tougher times may be in store, and that's why I'd avoid investing in Teladoc today.