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3 Reasons to Buy Teladoc Health Stock in August

By Keith Speights – Aug 10, 2021 at 5:52AM

Key Points

  • Teladoc's growth prospects remain strong even with some slowing following the tremendous performance last year.
  • The company has distinct and solid competitive advantages despite new rivals entering the market.
  • With shares down nearly 50%, Teladoc's valuation appears to be attractive in light of its growth prospects.

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This stock looks like a great one to buy sooner rather than later.

It might be easy to be down on Teladoc Health (TDOC -4.02%) right now. After all, the stock itself is down -- by a lot. Teladoc's shares are nearly 50% below the peak from earlier this year.

However, I wouldn't recommend throwing the towel in on this virtual care leader. Actually, my view is that investing in Teladoc makes a lot of sense right now. Here are three reasons to buy Teladoc stock in August.

A person holding a smartphone showing a physician on the screen.

Image source: Getty Images.

1. Growth prospects

There are a couple of primary explanations behind Teladoc's dismal stock performance since February. First, investors began shifting from growth stocks to more risk-averse picks earlier this year. Second, some are concerned about Teladoc's growth rate slowing. 

The first factor is merely a cyclical phenomenon that should only impact Teladoc's share price temporarily. The second issue might be a reason to worry -- were it not for the context that needs to be considered. Teladoc is coming off an unprecedented wave of growth in 2020 due to the COVID-19 pandemic. It would be surprising if the company's growth rate didn't slow somewhat.

Actually, Teladoc's growth continues to look impressive on several key fronts. In the second quarter, revenue per member per month soared 142% year over year and 10.3% quarter over quarter. Utilization rose to 21.5% from 16% in the prior-year period and 19.6% in the first quarter of 2021. The company's number of visits jumped 27.5% year over year and 10.2% sequentially. 

More importantly, Teladoc's long-term growth prospects remain exceptionally strong. Consulting firm McKinsey & Company projects that the virtual care market will expand to $250 billion annually in the U.S. alone. Teladoc is currently the biggest player in virtual care yet still has less than 1% of that huge potential market.

2. Competitive advantages 

Of course, Teladoc Health isn't the only company vying to win in the virtual care market. My view, though, is that the company has several competitive advantages that put it in a great position to remain the market leader.

It certainly helps that Teladoc's customer base already includes more than 40% of Fortune 500 corporations. The company works with more than 50 U.S. health plans. Teladoc is also a key telehealth partner with retail pharmacy giant CVS Health

Teladoc CEO Jason Gorevic said in the company's Q2 conference call, "It's not enough to simply virtualize the current healthcare experience, simply putting a doctor on the screen. The healthcare system is already fragmented, and virtual care shouldn't simply mirror that problem." His comments underscored what I think could be Teladoc's biggest competitive advantage -- its focus on whole-person virtual care.

The company offers the broadest array of virtual care services in the industry. Teladoc's acquisition last year of Livongo Health padded its lead on this front. Other companies, even massive ones such as Amazon.com, will try to dethrone Teladoc. But as long as they take more of a piecemeal approach, I suspect Teladoc's spot at the top of virtual care will remain secure.

3. Valuation

Sure, Teladoc Health's shares trade at a little over 12 times sales. No one would view that multiple as cheap. And, yes, Teladoc isn't profitable yet, which means we can't use earnings-based valuation metrics. However, I nonetheless think that valuation is a good reason to buy the healthcare stock right now.

As previously mentioned, Teladoc's shares have fallen close to 50% from the highs set in February. The company's market cap currently stands at around $24 billion. That's a low valuation, in my opinion, when Teladoc's growth opportunities are taken into account.

Wall Street analysts appear to agree. The consensus one-year price target for the stock reflects a premium of more than 50% above Teladoc's current share price. If this target is anywhere close to right, investors might soon find it a lot easier to be upbeat than downcast about the stock.  

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keith Speights owns shares of Amazon and Teladoc Health. The Motley Fool owns shares of and recommends Amazon and Teladoc Health. The Motley Fool recommends CVS Health and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Teladoc Health Stock Quote
Teladoc Health
TDOC
$26.49 (-4.02%) $-1.11
Amazon Stock Quote
Amazon
AMZN
$93.95 (0.58%) $0.54
CVS Health Stock Quote
CVS Health
CVS
$100.41 (-0.84%) $0.85

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