Shares of Amwell (NYSE:AMWL) have been sliding since the digital health start-up made its market debut in September. The company's platform for telehealth services is connecting providers to patients and their insurers at a pace that doesn't seem reflected in the stock's performance.

Is Amwell a good stock to buy now that it's 38% off its peak? Let's weigh the company's strengths against the challenges it faces to find out.

A woman sits on a sofa as she speaks with a medical professional on a laptop.

Image source: Getty Images.

Reasons to buy Amwell

The coronavirus pandemic lit a fire under healthcare providers that had previously been hesitant to engage patients at a distance. At the end of September, Amwell's telehealth platform boasted 62,000 active providers, which was 930% more than the company had a year earlier. During the third quarter, the number of visits Amwell facilitated rose 450% year over year to 1.4 million.

Before the COVID-19 pandemic, the majority of visits Amwell facilitated were for on-demand urgent care but that's been turned upside down. Results of Amwell's latest physician and consumer survey show that just 21% of people reporting virtual visits in 2020 did so for on-demand care while 54% had a scheduled visit with their primary care physician.

With at least two effective vaccine candidates on the way, the COVID-19 pandemic's days are numbered. Luckily for Amwell, America's new comfort level regarding telehealth services is here to stay.

Results of Amwell's survey also suggest the rapid increase in usage for regularly scheduled physician visits won't simply disappear once we don't have to worry about spreading a deadly virus. The vast majority of Americans already prefer telehealth visits, especially when they don't need to leave their office to complete one. Physicians are on board too with nine out of 10 saying they'd use telehealth for renewing prescriptions and regular checkups for patients with chronic conditions.

Reasons to avoid Amwell for now

Amwell was losing money before the COVID-19 pandemic boosted the popularity of its services. Instead of pushing the company toward profitability, expenses have been outpacing top-line revenue growth. Revenue during the third quarter rose 80% year over year to $62.6 million, but fees that physicians collect after each visit Amwell facilitates, plus other costs of revenue soared 121% to $42.1 million.

Amwell facilitated 1.4 million total visits in the third quarter, which should be enough to see signs the company's business model can deliver a profit. Instead, Amwell reported a loss in the third quarter that exceeded revenue.

A successful initial public offering (IPO) in September allowed Amwell to finish the third quarter with about $1.1 billion in cash and investments, but the company could chew through that cushion in a few short years if it can't find a way to make money with its telehealth service platform. Unfortunately, raising prices to bridge the gap between revenue and expenses will be next to impossible. 

Caught in a spiral?

Teladoc Health (NYSE:TDOC) expects to facilitate more than 10 million medical visits in 2020 and it isn't the only competitor in this space. Healthcare providers have dozens of telehealth platform options to partner with and the lack of costs associated with switching platforms means Amwell probably won't be able to raise its prices without losing subscribers.

Amwell stock has fallen a long way from the high points it reached shortly after going public. Until the company's bottom line shows signs its business has a sustainable advantage over its peers, this is a falling knife that you shouldn't try to catch.

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.