A special purpose acquisition company (SPAC) is a publicly traded shell company that raises money in an IPO in order to acquire a private business. Through this process, the private company effectively becomes public without having to go through a formal IPO process. SPACs have become popular in recent years because they are a quicker route for companies to go public, and this growing investor demand has led to a boom in the number of SPACs in the market.

One of those SPACs, Healthcare Merger Corp. (NASDAQ:HCCO), recently announced the acquisition of SOC Telemed, one of the largest providers of acute-care telemedicine. Should investors buy into this soon-to-be-public company?

What the deal means for investors

SOC Telemed provides medical diagnosis and treatment via telecommunications technology. The company has built a software platform that connects a network of physicians and consultants to respond to patients who need immediate treatment options.

The acquisition, which values SOC Telemed at $720 million, will be funded using the cash Healthcare Merger Corp. raised through its IPO, with additional equity funding from accounts managed by BlackRock, Baron Capital Group, and ClearBridge Investments. In addition to buying out the existing equity owners, the funds from the acquisition will be used to pay off the company's debt, leaving it with a healthy balance sheet to begin its life as a public company.

With the cash infusion from the IPO, SOC Telemed will be able to more aggressively invest in its business to better penetrate the growing telemedicine sector as virtual care becomes ever more prominent during the COVID-19 pandemic. The deal is expected to close by the end of 2020.

a person holding an ipad with a doctor on video chat

Image source: Getty Images.

SOC Telemed's business model

Telemedicine was gaining popularity before the coronavirus, but the pandemic has increased its adoption. As hospitals and physicians struggle with patient care and complications created by COVID-19, virtual care has become an attractive alternative, allowing patients to safely receive care from home.

SOC Telemed is a beneficiary of this trend. The company manages a cloud-based platform for connecting care providers to patients and provides data analytics to reduce costs and improve outcomes. SOC's platform manages the process of collecting the patients' requests and matching them with care providers. The company employs 172 board-certified neurologists, psychiatrists, and intensivists (physicians who care specifically for the critically ill), in addition to more than 10,000 physician specialists from third-party sources that consult with patients in 47 states.

In exchange for this, the company charges fixed monthly fees based on long-term contracts that span an average of 48 months. This provides predictable, recurring revenue, which is bolstered by a high renewal rate. SOC has a diversified client base serving over 800 healthcare facilities including over 500 acute care hospitals.

The effects of the coronavirus on the healthcare system are complicated. In many cases, patients have had to delay more routine procedures due to the prioritization of patients in critical condition. Therefore, SOC Telemed expects to see a 13% decrease in revenue for 2020 compared to 2019. However, 2021 sales are expected to increase 40%, and the company has guided for a 55% gross margin. The long-term earnings potential could be enormous if the company is able to maintain strong growth and margins.

A new way to bet on the fast-growing telehealth market

Increased acceptance by regulators, patients, and providers, plus the tailwinds from the pandemic, have all made telemedicine a fast-growing industry. Its current total addressable market (TAM) is $2.8 billion, but SOC Telehealth believes the market could eventually be worth as much as $9 billion if telehealth is embraced by specialists such as cardiologists and palliative care physicians.

From an investment standpoint, Teladoc Health is the company's most notable publicly traded peer, and its share price has rocketed upward in 2020 due to the greater adoption of telehealth. This gives investors a reason to believe that SOC Telemed could also be received well by the stock market.

The SPAC acquisition values SOC Telemed at 9 times its enterprise value to 2021 revenue. This may appear to be a rich valuation in absolute terms (lower is generally better for an EV/revenue ratio), but it's actually much lower than those of similar companies, including Teladoc or Zoom Video Communications.

SOC Telemed is positioned in a sweet spot regarding ongoing healthcare trends. Investors should take a closer look, as this could be the next telehealth stock to soar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.