Over the last year, Cathie Wood of ARK Investment Management arguably became the face of growth investing. And while following its goal to "invest solely in disruptive innovations," Teladoc Health (TDOC -2.75%) became one of the largest holdings across several of Wood's ETFs, including the ARK Innovation ETF (ARKK 2.47%), ARK Next Generation Internet ETF (ARKW 2.55%), and ARK Genomics Revolution ETF (ARKG 2.30%).

ARK's disruption-focused stock picking approach yielded spectacular results in 2020. ARK Innovation rose 149%, while Teladoc followed closely with a 139% return. 2021 has been a bit of a different story, as the market shifted to post-pandemic "reopening" stocks, pushing ARK Innovation down 11% year to date. Teladoc is down an even further 27% compared to the S&P 500, which is up 11%.

Through it all, ARK has continued to buy more Teladoc stock, adding steadily to its already substantial positions. Teladoc now represents the No. 1 holding in ARK Genomics, No. 2 holding in ARK Innovation, and No. 6 holding in ARK Next Generation Internet. So what exactly is behind ARK's conviction in Teladoc? 

Person video-chats with a physician over a cell phone.

Image source: Getty Images.

Massive virtual care market opportunity

One clue is ARK's widely stated belief that "disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be. They aren't sizing the opportunity and they aren't analyzing the disruption."

That certainly could be the case with Teladoc. COVID-19 has caused an acceleration in the use of telehealth, and Teladoc was a big beneficiary. In 2020, Teladoc's total visits grew to 10.6 million -- a 156% increase year over year. But Teladoc is positioned for much more than video visits for socially distanced consumers.

In late 2020, Teladoc closed an $18.5 billion acquisition of Livongo, a leader in diabetic care with innovations in "applied health signals" and digital coaching. Since then, Teladoc has been moving into other chronic condition areas and more broadly into what Teladoc calls "whole person care." This evolution beyond its virtual urgent care roots represents a massive market opportunity for Teladoc. 

A 2020 McKinsey & Company report on telehealth suggested virtual care could expand from virtual urgent care to encompass approximately 20% of Medicare, Medicaid, and commercial spending in physician offices, outpatient centers, and home health. This shift represents around a $250 billion U.S. market opportunity for companies like Teladoc. That estimate doesn't even include the potential for international expansion.

Extending its leadership position 

In order to take full advantage of this potential opportunity, Teladoc will need to execute on a number of fronts.

First, Teladoc must continue to increase revenues through growth in membership and utilization. In the first quarter, year-over-year membership grew 20% to 51 million members, total visits grew 56% to 3.2 million, and revenue grew 151% to $453.7 million.

Second, Teladoc must increase the number of products available to and used by members. Patients with multiple conditions like diabetes, musculoskeletal pain, or behavioral health tend to be sicker, require more services, have higher retention rates, and have higher satisfaction levels with the service. In 2020, only about 27% of Teladoc members had access to two or more products, leaving lots of room for improvement in this metric.

Third, Teladoc needs to embed differentiating technology into every aspect of its operations to avoid becoming commoditized. Technology like Livongo's applied health signals can increase performance levels far above the status quo by identifying patients with risky conditions and providing "nudges" for them to follow guidance and take medications. Teladoc claims to be delivering 25,000 personalized health nudges every day, but the real value will come from having a measurable effect on important health outcomes, like fewer heart attacks or strokes among patients.

Finally, Teladoc needs to deliver customers increasing value from its services. Today many employers and health plans pay for virtual care services on a "per member per month" basis. Most would rather pay for "engaged members" who actually use and like the service.

Ultimately, the industry is moving toward "value-based care," in which healthcare providers are incentivized to reduce the overall cost of care. Investors should watch for signs that Teladoc is supporting these new payment models to drive more profitable revenue and create barriers for competitors unable to deliver more value.

Follow the leader

ARK defines disruptive innovation as "the introduction of a technologically enabled new product or service that potentially changes the way the world works." Teladoc seems to offer exactly that, and checks all the boxes to have earned its place as a top ARK holding. By taking a page out of Cathie Wood's playbook, investing in a market leader like Teladoc could make your portfolio healthier for years to come.