Shares of telehealth leader Teladoc (TDOC -0.86%) are up 140% in 2020 with less than a day before 2021 begins. It was a big year for the company, as remote healthcare delivered via phone or video conferencing went from small niche in the healthcare universe to a mainstream service.
2021 will present new challenges, and probably continued investor criticism regarding the acquisition of chronic condition management company, Livongo Health. But I think these challenges are surmountable. Here are three catalysts to watch for this healthcare technologist.
1. Teladoc battles new competition
Teladoc has put up some impressive numbers this year. Through the first nine months of 2020, revenue increased 79% year over year to $711 million. However, now that Teladoc is more of a household name (and lots of investors have piled in), it's hard for me to get as excited about the company as I was a few years ago when it was still flying under the radar. All of the attention it has received from investors hasn't gone unnoticed by the healthcare world either.
Of chief concern is Amazon's (AMZN 1.84%) testing of the telehealth market. It has started offering remote-care services to employees, but there is worry the e-commerce disruptor could expand its offering beyond the confines of the company. There are other upstarts too, like Alphabet-backed (GOOGL 2.53%) (GOOG 2.52%) Amwell (AMWL -4.27%), which is partnering with healthcare providers and health insurers. Countless other upstarts are receiving investment funding from insurers, hospital operators, and other healthcare groups.
Teladoc benefited from a rising tide in 2020, but as the surge in remote-care demand hastened by the pandemic moderates in the new year, it will be important to keep an eye on how the company performs with all of the new market entrants nipping at its heels. Teladoc is on track to have facilitated over 10 million patient visits worldwide in the last year, so it's not that the company is running out of new patient-healthcare professional visits to empower with a shot of digital communication. On the contrary, it's still just barely scratching the surface. But a myriad of new options could put a damper on its patient-visit growth trajectory -- and the revenue this generates.
2. Livongo could help it stay in growth mode
Teladoc has enjoyed an early lead in offering remote care. It has established itself internationally as well, so this company is far from pigeon-holed in an increasingly competitive U.S. healthcare industry.
Nevertheless, I think the flood of new competition in part explains why the company wanted to add Livongo Health to the fold. Telemedicine is no longer a secret, but the addition of Livongo's connected-management service for diabetes, hypertension, and behavioral health strengthens the platform overall. It's another tool for Teladoc's business and insurer partners to put to use to help reduce employee and participant healthcare costs -- not to mention improve care outcomes for patients.
From an investment perspective, Livongo could play a key role for Teladoc if the telemedicine momentum starts to slow. After all, Livongo was growing at an even faster rate than Teladoc (revenue was up 126% year over year in the third quarter of 2020), but this is about more than gaining access to an expanding business. Livongo's data analytics and patient-coaching platform will be put to use across other Teladoc services and could be a key competitive advantage against its peers.
In short, I think Teladoc and Livongo have a better chance at maintaining long-term expansion together than they did apart. The merits of the tie-up will become evident in 2021 if Teladoc can hold onto a double-digit year-over-year percentage rate of expansion. The company's full-year 2019 revenue grew 29%, so any rate above this would be a positive indicator, in my mind.
3. Where will the profits go?
On a final note, profitability is another factor to keep a close eye on in 2021. On an unadjusted basis, Teladoc still isn't profitable; it generated a net loss of $91.2 million through the first three quarters of 2020. However, using free cash flow (revenue minus cash operating expenses and capital expenditures), the company started operating in the black in 2019 and posted positive free cash flow of $58.6 million through the first nine months of 2020.
Granted, Teladoc is prioritizing expansion rather than profitability at this stage of its existence, and this won't change in 2021, especially with the high-flying Livongo now in-house. But reaching free-cash-flow-positive territory is an important milestone for a company like Teladoc. It means it's still able to self-fund its growth initiatives without dipping into the balance sheet. This frees up the company to pursue even more opportunities. I expect more money to be allocated toward sales and marketing to support the merger with Livongo and take advantage of cross-selling opportunities between the two businesses' customers. Teladoc was an acquisitive company even before it made the Livongo takeover, so perhaps another deal will be in order.
Either way, expect to see Teladoc make more progress on the bottom line in the year ahead as it reaches toward true profitability. And look for signs it is finding new places in which to expand with its newfound cash flow. 2021 should be a momentous year for Teladoc, and there are things that could go wrong and cause it to stumble. However, with a market cap of just $29 billion and trading for a reasonable 17 times trailing 12-month revenue, there's no shortage of runway ahead for this company as it seeks to disrupt the global healthcare industry.