Digital health was a struggling industry prior to the coronavirus pandemic, but COVID-19 changed the game, pushing consumers and providers alike toward digital health solutions. Unsurprisingly, leading player Teladoc Health (NYSE:TDOC) emerged as a key beneficiary of this explosive industrywide expansion, recording a record number of virtual care visits during the pandemic, and its shares are up 133% year-to-date (YTD).
While some have wondered whether these effects would be fleeting, the coronavirus does seem to have brought about a longer-lasting change in consumer behavior related to the adoption of digital health solutions. This was evident in Teladoc's stellar third-quarter performance, with the top line up 109% year over year (YOY) and total virtual care visits up 206%. The company also just completed its merger with Livongo Health, an $18.5 billion mega-deal creating a company that could become a one-stop shop for all virtual care needs.
However, the market reacted unfavorably to both these announcements. Teladoc's share price has fallen by almost 13% in the past month as political uncertainty and surging COVID-19 cases have dampened the market overall. It's ironic that a stay-at-home stock like Teladoc has become a victim of this marketwide malaise, but the pullback has presented a very attractive opportunity for retail investors to start a small position in Teladoc's otherwise pretty expensive stock.
Solid performance in the third quarter
Teledoc's third-quarter revenue was up 109% YOY to $289 million in the third quarter, even though this is a seasonally weak time in terms of volume. This is the highest YOY quarterly top-line growth rate Teladoc has seen over the past two years. And the total virtual care visits reported by the company's network of providers was up by 206% YOY to 2.8 million. The company now expects to cross the $1 billion revenue mark in fiscal 2020, up from its previous revenue guidance of $980 million to $995 million.
Improving sales mix
Teladoc Health has demonstrated a noticeable improvement in its sales mix. Non-infectious diseases including hypertension, back pain, anxiety, and depression now account for half of its total virtual care visits, whereas a year ago that portion was only one-third. Virtual care visits for dermatology and behavioral health specialties in the business-to-business (B2B) channel are up 500% YOY.
The increasing shift toward non-infectious diseases, many of which are chronic conditions, is associated with more reliable and recurring revenue streams for Teladoc Health. The merger with Livongo will further improve the company's penetration in the chronic care market.
The Teladoc and Livongo merger could prove to be a game-changer
Teladoc Health's merger with Livongo is expected to redefine virtual care in the $121 billion U.S. digital health landscape. The combined company will ideally become a single source for patients with acute, episodic, and chronic care needs. And the companies' combined data insights and broadened data access may lead to improved overall patient outcomes, given that a treating physician will get a more holistic view of the patient's overall health.
Both Teladoc and Livongo have managed to ramp up the scope of their services rapidly during the pandemic, which is a testimony to the companies' ability to scale over a limited time. Employers, which are the key customers in the telehealth industry, prefer to depend on a single vendor for providing clinical services to their employees. This trend was demonstrated in the second quarter when two-thirds of Teladoc clients opted for multi-product purchases. The merger of Teladoc Health and Livongo has created a first-of-its-kind "whole person" care offering, very much in line with current employer expectations. At the same time, the combined company can now explore several cross-selling opportunities across products, channels, and markets. This, in turn, is expected to boost innovation and lead to improved member engagement.
Risks to consider
Teladoc Health is trading at a price-to-sales (P/S) multiple (calculated by dividing share price by sales earned over the past 12 months) of 21.1, which is pretty exorbitant for a health technology company. Lofty valuations lead to high share-price volatility, which is not something investors prefer in times of heightened macroeconomic and political uncertainty.
Teladoc Health is also exposed to significant competitive pressures from technology giants, including Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL), which have made major strides in the electronic health records (EHR) segment.
Telehealth is still a nascent industry, and there are likely multiple regulatory developments to come. Some of these regulations may prove challenging for Teladoc. And finally, although the theoretical benefits of the Teladoc-Livongo merger are pretty clear, whether these actually materialize or not depends on the combined company's execution capabilities.
Despite all these challenges, Teladoc Health's industry-leading position in the rapidly expanding digital health segment makes the company too attractive to ignore for retail investors. Based on its risk-reward proposition, Teladoc looks like a solid growth pick for healthcare investors with average risk appetite.