Investors have experienced about a decade's worth of volatility packed into a single year in 2020. Unprecedented levels of uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic cost the widely followed S&P 500 more than a third of its value in the first quarter. Meanwhile, an eight-month-plus rally since the March 23 low has the benchmark index up nearly 15% for the year, through this past weekend.
But the investment world has watched businesses that offer game-changing growth potential fare even better. Telemedicine giant Teladoc Health (TDOC -2.75%) is the perfect example, with a 143% gain on a year-to-date basis.
The pertinent question, with Teladoc more than doubling this year and gaining 875% over the trailing five-year period, is if investors should still buy Teladoc Health's stock? Before reaching a verdict, let's first take a closer look at the various reasons why Teladoc is a company worth buying and possibly avoiding.
Here's why Teladoc might struggle
Possibly the biggest hurdle that Teladoc is going to need to overcome is the eventual resolution to the COVID-19 pandemic. Telehealth companies received a huge boost with physicians wanting to keep potentially infected and at-risk patients out of their offices. This has led to a surge in membership and fee-based virtual visits through the Teladoc platform. In each of the past two quarters, Teladoc has seen total visits more than triple from the prior-year period, with the company on track to handle over 10 million visits in 2020. There's obvious concern that the end of the pandemic could lead to a slowdown in virtual visit growth.
Teladoc is also expected to face increasing competition in the telemedicine space. The newly public American Well (AMWL), better known as Amwell, is one of Teladoc's greatest threats. In the third quarter, Amwell's active provider count grew tenfold from the prior-year period, with high-margin subscription revenue accounting for more than 40% of total sales. Most importantly, Amwell has snagged a handful of major partners, including health-benefits behemoth Anthem. Anthem, which is behind the Blue Cross and Blue Shield plans in more than a dozen U.S. states, is allowing its tens of millions of members virtual access to physicians 24 hours a day.
Another concern is the potential for sector rotation on Wall Street. If coronavirus vaccines are successful in halting the pandemic, we could see investors rotate out of stay-at-home stocks in favor of time-tested value stocks. Even if we don't see this happen across the board, Teladoc is currently valued at 15 times next year's sales, and it's unlikely to be profitable prior to 2022 or 2023. A focus on value would be bad news for Teladoc.
But there's another side to this story that needs to be told.
Teladoc could be the perfect stock to buy, even after its enormous run
What investors often overlook when analyzing telemedicine stocks is that they were growing like wildfire well before the pandemic struck. Teladoc had a compound annual growth rate of 74% between 2013 and 2019, which implies that its platform was hitting home long before virtual visits were deemed essential.
The beauty of the virtual visit model is that it benefits the entire healthcare chain. Physicians have more flexibility to their schedule, patients never need to leave the comfort of their homes, and health insurers are almost always charged less for virtual visits than in-person consultations. This makes it likely that insurers and physicians will push for increased telemedicine usage.
Another catalyst in Teladoc's sails is the now-completed acquisition of applied health signals company Livongo Health. Livongo collects copious amounts of data on patients with chronic illnesses and leans on artificial intelligence to assist with sending these folks tips and nudges that'll help them lead healthier lives. Livongo has doubled or nearly doubled its diabetes subscriber count in each of the past four years, and had already pushed into recurring profitability (prior to its acquisition) despite capturing only a little more than 1% of the addressable U.S. diabetes market.
It should be noted that Livongo will be expanding well beyond diabetes. The company has plans to offer its health solutions to patients with hypertension and weight control management issues. In my opinion, Livongo's full portfolio of solutions might be applicable to over 40% of the U.S. population.
Furthermore, the combination of Teladoc and Livongo mean growth, growth, and more growth for investors. Considering how quickly the healthcare landscape is shifting during the pandemic, it's difficult to forecast how quickly this newly combined company can grow. But according to Wall Street, sales are expected to more than triple to approximately $3.4 billion in 2023.
Now that we've covered both the promise and peril of owning Teladoc Health stock, the $64,000 question remains: Is it still worth buying after a 143% run-up in 2020?
Considering that I labeled Teladoc as the "one stock I'm most excited about right now" in late October, the answer is going to be an emphatic "yes."
I have to admit, as a Livongo Health shareholder, I wasn't exactly thrilled with the idea of Teladoc scooping up one of my largest holdings. Livongo had already established itself as profitable on a recurring basis, and it was growing much faster than Teladoc. But it didn't take too long for my skepticism to abate.
On Oct. 12, Livongo announced that it was leveraging an existing relationship Teladoc had in place with Guidewell Health (the parent of Florida's Blue Cross Blue Shield plans) to offer its services to approximately 50,000 members with diabetes. The ability for these two companies to cross-sell is going to be insanely profitable over the long run.
What's more, Teladoc Health's nosebleed valuation isn't so terrifying when to take into account its superior growth rate. Based on Wall Street's 2023 sales forecast, and both Teladoc's and Livongo's penchant for trouncing those estimates, it's valued at perhaps 8 times 2023's full-year revenue.
Investors can still buy into the Teladoc Health grow story with confidence.