Like those who sell sunscreen at the beach or umbrellas on a rainy day, telehealth providers found themselves in demand this spring when the novel coronavirus shut down everyday life. As we've adapted to living with the virus, those virtual visits have dropped off, and investors are left wondering how much patient behavior will change permanently -- and which telehealth provider is in the best position to benefit.

Amwell (AMWL -6.64%) and Teladoc (TDOC -0.75%), along with privately held MDLive, are the primary players in the telehealth market. As virtual visits became the sole way for people not suffering from COVID-19 to see many clinicians, these services came to provide invaluable substitutes for routine office visits. But while the businesses seem very similar, there are some key differences. Examining them will help us understand which company will make a better investment over the next three to five years.

A man typing on a keyboard with a tablet up as he meets with his doctor through a virtual visit.

Image source: Getty Images.

Perfect product/market fit for our times

As the pandemic took hold in the first half of the year, revenue accelerated at both Teladoc and Amwell. The rising tide has lifted all boats, but it remains to be seen whether this increased usage -- and revenue -- will persist. Investors are eagerly awaiting the companies' quarterly reports, with Teladoc slated to go first on Oct. 28. 

Revenue Six months ending June 2020 Growth versus 2019
Amwell $122.3 million 77%
Teladoc $421.8 million 63%

Source: Company documents. Chart by author.

Amwell only recently went public, striking while the iron was hot with an IPO as growth soared. Teladoc took advantage in a different way, making one of the most headline-grabbing acquisitions of 2020 with its purchase of Livongo (LVGO). But while this deal garnered a lot of attention, it was only one of three significant acquisitions the company has made in the past two years. Digging into the numbers -- and the market opportunity -- helps explain why.

Land grab

Ultimately, the goals of a telehealth company are to increase the number of members accessing its services and drive higher utilization by those members. This is done by signing deals with health systems --the hospitals, surgery centers, and other facilities that provide patient care -- and health plans -- the insurers and employer plans that cover some portion of the cost of care. This combination of goals increases the user-based revenue and allows price increases as the service demonstrates value. Making agreements with health systems and health plans is generally how the companies increase their number of users. Below, we see the number of clients for each company as reported in Amwell's S-1 filing and Teladoc's 2019 annual report, respectively. 

Health Systems 2018 2019
Amwell 92 138
Teladoc > 300 > 300

Source: Company documents. Chart by author.

Health Plans 2018 2019
Amwell 52 56
Teladoc > 40 > 50

Source: Company documents. Chart by author.

Both companies have made acquisitions to deepen their offerings for health systems. In 2018, Amwell acquired Avizia, an acute-care provider. In 2019, the company bought behavioral health and telepsychiatry provider Aligned Telehealth. Similarly, Teladoc purchased InTouch Health early this year, pulling the leader in hospital and health-system telehealth under the company's umbrella. 

In addition, Teladoc made a transformational deal in August, agreeing to purchase Livongo for $18.5 billion. This purchase, when finalized, will combine the leading telehealth provider with a fast-growing remote-health management company focused on chronic conditions.

This is notable for two reasons. First, Livongo's revenue was up 119% in the second quarter. Management's peer-reviewed, proven model for lowering costs and improving patient health is paying off in the form of rapid customer uptake. Second, the company's focus -- chronic conditions -- makes up an estimated 84% of healthcare spending. These moves will certainly affect how each company grows in the short term, but other factors may contribute more to the companies' success over a longer time frame.

Longer-term factors

Although splashy acquisitions and super-fast growth are certainly notable, companies that come to dominate industries don't always win on their own merits or find their best growth opportunities on their home turf. Recall all of the forgotten search engines that were cast aside when Microsoft embedded Internet Explorer into its operating system in 1996, or consider that Kentucky Fried Chicken is the most popular fast-food restaurant in China. When projecting a winner, it's important to consider why a particular company may become a leader in its market.

Amwell and Teladoc can each make a case for future dominance in their own way. Teladoc has an advantage internationally, deriving 20% of revenue from the global market in 2019. Amwell didn't break this number out in its S-1 filing, but it mentioned international opportunities dozens of times and highlighted partnerships in Israel, China, and Europe. In fact, partners Philips (PHG 0.15%) and Cerner (CERN) generate 48% and 11%, respectively, of their sales outside the U.S. The Cerner partnership is notable because Amwell is the sole preferred provider of telehealth through the company's electronic health records (EHR) platform. Similarly, the company has partnered with Philips to provide telehealth solutions for the latter's global services.

Business is not zero-sum

The global telemedicine market is growing at an estimated 23.5% per year, and it's expected to reach $185 billion by 2026. While growth has slowed since the spring -- telemedicine accounted for 69% of all outpatient visits in April and was down to 21% by mid-July -- the long-term trends are clear.

Competitor MDLive is aiming to go public in early 2021, so investors who want exposure to this trend will face even more choices soon. Additionally, Zoom Technology's focus on healthcare and its demonstrated ability to solve problems for customers could disrupt the incumbents and steal the growth baked into Teladoc's and Amwell's share prices.

Choosing between Amwell and Teladoc is really a choice between business philosophies. If you believe partnerships with legacy healthcare companies will be the winning formula, Amwell is for you. However, if you believe broadening services -- especially into chronic-disease management -- is the future of telemedicine, Teladoc should be your choice. 

Ultimately, both companies could continue on their strategic paths, growing with the market and rewarding investors along the way. For my part, I can't help but wish that Amwell, with its partnerships and high customer-satisfaction ratings, had merged with Livongo. Since it didn't, investors may want to buy a small position in each company to benefit from the global telemedicine trends.