Stocks are driven by stories. Although long-term performance is determined by how much a company earns, its price at any given time is a reflection of the story market participants choose to believe. That's why markets have buyers and sellers. They believe different stories about the company's future.

The story for Teladoc Health (TDOC -1.04%) has gotten more complicated in the past two years. What was once a virtual health provider with crisp growth has morphed into the possible "future of healthcare" and one of the largest holdings of Cathie Wood's ARK Innovation ETF (NYSEMKT:ARKK), ARK Next Generation Internet ETF (NYSEMKT:ARKW), and ARK Genomics Revolution ETF (NYSEMKT:ARKG). After an enormous acquisition and mass vaccinations, others see a difficult path to profitability for the stock. The company's second quarter results aren't likely to change any opinions.

A doctor doing a virtual visit while sitting at a desk.

Image source: Getty Images.

Utilization continues to rise

One of the most important questions coming out of the pandemic is whether consumer behaviors have been permanently altered. Most people expect food delivery, e-commerce, and remote work to slow compared to the pace of growth in 2020. It's only natural that some people would flock back to restaurants, malls, and offices when they are safer. 

That seemed especially true of doctors' offices. Virtual visits became the norm last year but patients want to see their doctors in person -- or do they? Teladoc is seeing utilization -- the percent of its members who are taking advantage of virtual visits -- continuing to climb.

Period Utilization
Q2 2021 21.5%
Q1 2021 19.6%
Q4 2020 17.7%
Q3 2020 16.5%
Q2 2020 16%
Q1 2020 13.4%

Data source: Teladoc Health

For those expecting things to go back to the way they were, there is no evidence of that yet. Despite the drop off in visits associated with infectious disease, specialty care and non-infectious disease are picking up the baton. In the second quarter, 80% of member visits were for non-infectious disease compared to 50% before COVID. It's a great sign that the company's platform is becoming embedded in its members' healthcare decisions.

The merger with Livongo is a drag

Growth and customer engagement are only beneficial when the economics of the business work. For Teladoc, that means adding more members and services should lead to more revenue than costs. It's on track. Gross margin climbed from 60.6% through the first six months of 2020 to 67.4% over that span this year. Similarly, its adjusted earnings before interest taxes, depreciation, and amortization have steadily climbed with growth (EBITDA).

Period Revenue Revenue Growth Adj. EBITDA Margin EBITDA Margin
FY21 YTD $957 million 127% 12.9% (6.6%)
2020 $1.09 billion 98% 11.6% (40%)
2019 $553 million 32% 5.7% (7.5%)
2018 $418 million 79% 3.2% (8.4%)

Data source: Teladoc Health.

Those are adjusted numbers. The unadjusted numbers tell a different story. From that perspective, the company lost $333.5 million in the first half of 2021. That is a lot more than the $55.3 million it lost during the same six months last year. Much of the difference is related to its acquisition of Livongo, a chronic disease management company. 

Given its grand ambitions for "whole person" care, the $18.5 billion purchase price can be justified. But the costs continue to overwhelm any near-term financial benefit. Since the deal closed at the end of October, Teladoc has reported $780 million in Livongo-related expenses for stock-based compensation and associated taxes, amortization of intangibles, and extinguishing debt. Shareholders have to hope that's coming to an end soon. Those costs don't count the fact that there are now 156 million shares outstanding, a 104% increase from this time last year. 

What makes a market

Eventually, acquisition costs will subside and the benefit of having Livongo in the portfolio should show up on the bottom line. For now, shareholders will have to deal with messy financial statements and management's adjustments pointing to eventual profits.

For others, the expenses show a company that simply bit off more than it could chew, caught in a cycle of diluting shareholders to keep the growth story alive. The same numbers but a different story. The battle between the bulls and bears on Teladoc is likely to rage until well into 2022.