As the world stands on the verge of getting vaccines for COVID-19, investors interested in the pandemic theme are faced with a dilemma. Do they sell stocks of companies that have been big winners from the health crisis of 2020, and move on to the Next Big Thing? Or do they hang onto the stocks for the long term?
There is no one answer, of course. But certain companies that had excellent growth prospects before COVID-19 have seen massive growth of their businesses because they were positioned in the sweet spot of trends that the pandemic accelerated. Whereas the growth rates of 2020 will not continue, the thesis for buying their stocks for the long term have been confirmed and even strengthened.
Such a stock is Teladoc Health (NYSE:TDOC). When the pandemic hit in the spring, clinics closed and patients sheltered at home, leaving remote healthcare as a logical option for people with chronic health issues. Teladoc is the leader in the space, with a network of over 50,000 clinicians in 450 sub-specialties available to patients in their homes. The company's revenue soared 63% in the first half of the year.
Clearly, that rate of growth won't continue. In fact, some investors may have been distressed about signs that Teladoc's business is hitting a plateau when it reported third-quarter results on Oct. 28. Total visits grew only 2.9% from Q2, down from sequential visit growth of 35% three months earlier. With the stock up 135% in 2020, is it time for investors to get out before Teladoc's business shrinks back to pre-pandemic levels and the shares tumble?
Virtual care is here to stay
Usage of Teladoc's services isn't going to go away. A McKinsey survey earlier this year found that 76% of consumers were highly or moderately likely to keep using telehealth services, up from only 11% in 2019. And most patients, 74% according to the survey, are highly satisfied by telehealth once they try it. People want to avoid waiting rooms full of sick people and appreciate having an alternative to taking time off from work or child care to visit a brick-and-mortar clinic.
It isn't just the patients who have warmed up to the benefits of telehealth. Teladoc's clients are health insurers, employers, and government agencies that contract with the company to provide services to their members and employees. These payers are recognizing that telehealth brings down the cost of healthcare while providing attractive new options to their beneficiaries. Teladoc has a client retention rate "very, very strongly in the 90s," according to CEO Jason Gorevic, who also said, "I think I've never felt better about the competitive landscape and our competitive position."
This growing embrace of Teladoc's services by the people paying the bills will help the company hang on to their coronavirus-fueled new business. The expansion of coverage by Medicare and Medicaid will also be a big factor in the company's future growth, given the prevalence of chronic conditions among beneficiaries of those programs. Teladoc has added 2.5 million Medicare Advantage members, and that number is rising rapidly.
New avenues for growth
With the pandemic accelerating the acceptance of virtual healthcare, Teladoc has plenty of directions it can go to keep its business growing. Besides signing new clients and expanding internationally, the company can increase revenue by onboarding more of its clients' members, growing utilization by its subscribers, and adding new specialties. Teladoc launched a new mental health service in October that it thinks will be a popular way to get convenient and stigma-free access to psychiatrists, psychologists, and therapists.
Teladoc's ambitious vision is to be the "front door" to the healthcare system. Earlier this year, an acquisition of InTouch Technology gave Teladoc an enterprise platform it can sell to hospitals and physician practices that allows those clients to connect their own clinicians to patients. Now the Teladoc app can be used to initiate virtual sessions with either the company's network of practitioners, or with healthcare providers local to the patient. Teladoc hasn't yet started breaking out the revenue from this new business, but it reported that its platform had initiated nearly a million sessions with client providers in Q3 and that that metric is growing faster than the company's top line.
Teladoc's recently completed merger with Livongo also builds more value for patients into its app. Livongo's tools for managing chronic conditions will be integrated into its platform, making it a complete healthcare delivery system.
The long-term opportunity is clear. The short term is less certain.
Most medical care requires in-person visits. But McKinsey estimates that about 20% of spending on Medicare, Medicaid, outpatient care, and office visits could be virtualized. That amounts to a massive $250 billion opportunity. Teladoc's front-running position in this market is the reason long-term investors should own the shares.
The outlook for this healthcare stock in the next few quarters is less clear. The pandemic essentially pulled up future business for the company ... and also pulled up share gains. The business is much further along than it would have been without COVID-19, but shares are also more expensive. Year-to-year growth comparisons might get challenging in 2021, and investors might lose interest.
My position in Teladoc Health has grown large, but I don't intend to sell a single share. The stock may give up some gains in coming months, but, on the other hand, it might not. Trying to avoid a potential pull-back involves timing two decisions well: getting out near the peak and getting back in at a lower price. That's too hard.
Patient investors who believe in the long-term thesis for Teladoc Health should just hang on. Five years from now, any dip in the share price will just look like a buying opportunity.