When COVID-19 shut down the world economy last year, a lot of basic healthcare moved to the internet. Many doctors and patients avoided in-person meetings and met online. Not surprisingly, revenue took off for many virtual players, and the stocks followed suit. And the trend has shown no signs of abating. For instance, industry bellwether Teladoc Health reported 108% revenue growth in its most recent quarter. That's dramatic revenue growth on top of the outstanding growth Teladoc had last year, when the pandemic was raging and doctor's offices were shut down.
What does the future hold for the rest of this sector? Three Fool contributors are bullish on Doximity (DOCS +3.41%), Teladoc competitor American Well (AMWL 3.61%), and small-cap name UpHealth (UPH +0.00%), even after the pandemic ends.
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1. Doximity wins thanks to the network effect
Taylor Carmichael (Doximity): Doximity is a professional networking site where healthcare workers can find each other and collaborate online. It's similar to Facebook or Microsoft subsidiary LinkedIn. The major difference is that Doximity is specific to healthcare. That's a huge market opportunity -- healthcare makes up about $4 trillion of the U.S. economy.
Eighty percent of doctors in the U.S. are already on Doximity's internet platform, and 90% of medical students can be found there. Yes, Doximity is top dog and first mover, and it enjoys a strong brand and mindshare in healthcare. But perhaps the most important aspect of this business is the company's powerful network effect. Competitors trying to supplant Doximity will have an exceedingly hard time. Why would any doctor bother to join another network when you can't find other doctors there? Doctors looking for doctors go to Doximity, because so many doctors are already on the platform.
Doximity pretty much has a monopoly on doctors' eyeballs in the U.S. -- at least outside the electronic healthcare records space -- and the question for investors to ponder is just how valuable that market is. The company estimates its market opportunity at $18.5 billion. That's composed of $7.3 billion in pharmaceutical marketing to doctors, another $6.9 billion in job placement in healthcare, and a $4.3 billion opportunity in software telehealth.
What's kind of amazing is that Doximity just rolled out its telehealth platform, Dialer, last year, when COVID-19 first hit. It's a freemium model, with Doximity offering the basic telehealth service free to physicians and their patients. Not surprisingly, the website was swamped with demand during the lockdown. And the numbers are shocking -- Doximity performed 63 million telehealth visits in Dialer's first year of operation. That number dwarfs the 11 million visits Teladoc reported for 2020.
Can Doximity continue to prosper even after we put COVID-19 behind us? Absolutely. The company achieved its massive network way before COVID-19 hit, and it will continue to add value to healthcare when the pandemic is over. In my opinion this is the strongest company in the virtual healthcare space, and the stock will reward investors for years to come.
2. Amwell: Down but not out
George Budwell (American Well): Since its initial public offering last year, American Well Corporation, or Amwell for short, has lost a staggering 61% of its value. The telehealth company's dramatic fall stems from a mix of stiff competition, the somewhat slower than expected adoption of telehealth services during the ongoing COVID-19 pandemic, and a murky path toward consistent profitability in the near term. Amwell's stock, however, could be a hidden gem for investors with a long-term mindset. Here's why.
On the macro side of things, there's no doubt that healthcare -- like most industries these days -- is becoming increasingly virtualized. In fact, several industry experts expect telehealth to evolve into a core component of the healthcare ecosystem, although this gradual transformation may take longer than originally expected. The key issue is that it takes time for people to become accustomed to seeing a doctor in a virtual setting. Once this slow-but-steady behavioral shift does occur, though, the telehealth market ought to grow exponentially.
Why is Amwell particularly well suited to take advantage of this powerful trend? Although Amwell doesn't quite have the resources of industry leaders like Teladoc Health, the company has been playing catch-up of late. For instance, Amwell recently acquired Conversa (an automated virtual healthcare company) and SilverCloud Health (a digital mental health platform) to augment the capabilities of its telehealth platform known as Converge. While the latent value of these complementary acquisitions won't be realized overnight, Amwell should benefit enormously from this deep dive into telehealth as the market matures.
Bottom line: If you are a patient investor willing to hold a stock for a minimum of five years, Amwell might be worth adding to your portfolio right now.
3. UpHealth is making its mark
Zhiyuan Sun (UpHealth): Not only is emerging telemedicine company UpHealth gaining traction, but it is also thriving in the aftermath of the initial COVID-19 pandemic. During the second quarter of 2021, UpHealth's revenue grew by 28% sequentially to $39.2 million and broke even in terms of operating income before noncash items. That's pretty solid for a company with a market cap of only $668 million.
Despite being a small player, UpHealth's revenue streams are already well diversified. It derives just 35% of its sales from digital primary care consultations in the U.S. The company has a robust behavioral health and international telemedicine segment. Speaking of the latter, it has a presence in more than 10 nations (including a significant market share in India) with substantial contracts under negotiation.
Finally, the company has a telepharmacy segment that synergizes well with its digital consultations. It allows its physicians to directly write prescriptions at the end of the session. UpHealth's pharmacy covers all 50 states.
Recently, UpHealth extended its partnership with the European Union to facilitate COVID-19 tests, vaccines, analytics, and alerts to support reopening measures. The platform's outreach across the U.S. also expanded to more than 2,000 healthcare venues compared to 1,800 last year. In addition, it plans to roll out a new digital clinic initiative by the end of the year.
Due to these new developments, UpHealth anticipates it will be able to meet its goal of achieving 71% revenue growth for the full year compared to 2020. The company is also on the verge of breaking even in terms of earnings, with most of the negative cash flow coming from one-time acquisition-related costs. The stock is trading at a severe discount of just 3.6 times revenue, compared to peers like Teladoc and Amwell, both of which are trading at around 10 times sales. For these reasons, it is a solidly valued telehealth stock you don't want to miss.
