Investors love revenue growth. When sales are climbing rapidly, shareholders can imagine industries conquered, legacy competitors vanquished, and a future filled with profits after the company matures.

But all growth isn not created equal. Revenue might climb from acquiring new customers, selling new things to old customers, or simply raising prices. The best businesses are able to combine all three. For Teladoc Health (TDOC -0.53%), one of these growth levers appears to be slowing, and management is pointing to another one as a way to keep expanding the top line. For shareholders, that number could determine how Wall Street treats the stock over the next year.

A woman with a protective mask on doing a telehealth visit on her tablet.

Image source: Getty Images.

How Teladoc grows

The company generates revenue through subscription-based contracts with health systems and insurers, as well as visit fees from some clients. Additionally, Teladoc licenses its technology and sells hardware for conducting telehealth visits in a hospital setting. These sources of revenue aren't as diversified as they sound; the bulk of sales comes from subscriptions.

Source of Revenue 2020 2019 2018
Subscription Fees 79% 84% 84%
Visit Fees 19% 16% 16%
Other 2% 0% 0%

Data Source: Teladoc Health.

Consequently, the primary driver of growth in the past has been increasing the number of members covered under subscription-based contracts. Additionally, the price clients pay for each member, known as per member per month (PMPM) or per enrollee per month (PEPM), also contributes to growth when it is rising -- and it has been since Teladoc went public in 2015. Taken together, with more members and an increasing PMPM, it's easy to see how revenue has jumped nearly 900% since 2016.

However, one of those pillars of growth may be faltering.

Membership is stagnating

As the company gains market share, its ability to increase membership declines. While growth has been robust over the years, the pandemic may have pulled a lot of future business forward as organizations scrambled to ensure healthcare access during the lockdown. The theory is supported not just by the acceleration in membership last year but by the tepid growth projected by management for 2021.

Year Paid Members YOY Growth
2021 (guidance) 52 million to 54 million 0.4% to 4.2%
2020 51.8 million 41.1%
2019 36.7 million 61%
2018 22.8 million (0.2%)
2017 23.2 million 32.6%
2016 17.5 million 43.4%
2015 12.2 million N/A

Data Source: Teladoc Health. YOY = year over year.

Luckily for Teladoc, there are more ways to grow revenue than adding members. Another way is increasing the average price a client pays per member. Of course, those clients are going to want more value if they are paying more. That's where the Livongo acquisition comes in. 

Per member per month 

Thanks to an increasing number of services available for clients, the PMPM had been climbing, albeit slowly, over the years. Periodically, the company would sign a large client with a lot of negotiating power, resulting in a drop. Still, the long-term trend is clear. After the first quarter of combined operation with Livongo, that all-important number has rocketed higher. Management attributed more than half of the increase to Livongo's more expensive services.

A graph of per-member-per-month increasing from $0.5 when Teladoc went public to $1.76 in the latest quarter.

Data Source: Teladoc Health.

In 2020, two out of three deals were for multiple products. That continues a multi-year trend, and 43% of members now have access to multiple products, up from just 9% three years ago. The access not only improves retention and member engagement but boosts the price per member. The question investors are asking is whether bundling new services can make up for members coming on board at a slower rate.

Will it be enough?

To keep growth alive, Teladoc will have to continue expanding the suite of products and services it offers. Even further, the new offerings need to increase engagement along the patient journey, creating a relationship with members rather than being seen as just a transaction at random intervals. 

The more a member engages with the suite of products through self-service tools, wellness coaching programs, primary care, and specialists, the more data the company is able to gather. That data powers analytics that guide members through behavioral nudges and offers predictions or interventions that improve outcomes and lower costs over the lifetime of the relationship. Ultimately, that is Teladoc's value proposition, and the more it can be proven with data, the more readily clients will add products, leading to a higher per-member price. Combining the 2 million blood glucose data points per week from Livongo's platform with the 30,000 virtual visits and 100,000 patient messages per day on Teladoc's will only make this cycle more powerful.

For investors, a continuing increase in the percentage of customers who sign on for more than one product and the subsequent PMPM gains will hold the key to determining how long Teladoc's growth can continue. For now, management believes the pieces are in place to continue expanding PMPM and deliver the 30% to 40% sustainable growth that CEO Jason Gorevic committed to earlier this year. So far, the Livongo acquisition has been the perfect way to jump-start a new lever of growth.