One of the early adaptations during the pandemic was a shift to virtual care. Many healthcare companies touted their virtual services while others quickly developed an application to get in the game. It was a radical change to an industry that had been slowly advancing for the past decade.

Teladoc Health (TDOC 0.21%) became synonymous with telemedicine, and the stock rocketed to an all-time high. But it's been a tough slog since the peak. A bevy of competition and an enormous acquisition have Wall Street questioning its prospects. The stock is down 52% since February. Here's what analysts might be getting wrong -- and right -- about the path forward.

A patient having a virtual visit with a doctor through a tablet.

Image source: Getty Images.

Competition is in the eye of the beholder 

At first glance, it looks like Teladoc is surrounded on by companies waiting to take market share. A closer look reveals the bark may be worse than the bite for many would-be competitors.

Amwell (AMWL -7.84%) went public last fall with a $100 million investment from Alphabet's Google Cloud division. It hasn't been a great first year as a public company. The stock is down 55% from the initial public offering (IPO). In its most recent quarter, total visits and active providers were down 19% and 12%, respectively, from the same quarter last year. That's abysmal compared to Teladoc, which saw visits rise 28% year over year in the same period.

Doximity (DOCS 1.51%) recently provided its latest update for the quarter ending in June. It isn't so much a direct competitor -- it's a kind of LinkedIn for clinicians -- as a platform with some overlapping functionality. It launched a video dialer service in May 2020 that helped physicians on the platform conduct virtual visits. Although the company saw revenue grow 100% year over year, virtual visits per provider dropped. It was the result of implementing a paywall after the service was initially free at the beginning of the pandemic.

Finally, (AMZN -0.29%) confirmed in March that it would roll out its internal healthcare app to all of its employees, as well as other companies. It could prove to be the most direct competitor for Teladoc. It offers a wide range of services, including primary and urgent care. Other competitors -- beyond Amazon -- have either been acquired or combined in an effort to broaden their services.

Teladoc CEO Jason Gorevic doesn't seem concerned. In the company's first-quarter earnings call, he pointed to the breadth of offerings across the entire healthcare journey, in addition to the various types of healthcare companies in its customer base, to highlight Teladoc's advantages. Those comments seem to be validated by second-quarter results, when he announced that over 75% of new business was for multiple products. That compares with about 50% in the same quarter last year. 

Recent acquisitions are nothing new

Many on Wall Street couldn't believe their ears when Teladoc announced it was buying Livongo last August for $18.5 billion. The final price tag was less, after both companies' shares fell in the aftermath. Still, it was an enormous deal that essentially doubled the size of the company. But those who have been watching Teladoc for years know it was nothing new. It has made a habit of building its business through acquisitions -- even if they were much smaller.

Year Acquisition Amount Reason
2020 Livongo $13.9 billion Digital chronic care management
2020 InTouch Health $1.07 billion Telehealth for hospitals and health systems
2019 Vida Health $5 million Investment in chronic are management company
2019 MedecinDirect $11.2 International Expansion
2018 Advance Medical $351.7 million International Expansion
2017 Best Doctors $445.5 million High-acuity, complex case consultation

Data source: Teladoc.

All told, the company has spent $15.8 billion on acquisitions in the past few years and currently sits with a market capitalization of $23 billion. That's not a ringing endorsement of the deals. Despite increasing the size of the business and its offerings, the company still isn't cash flow positive. For that reason, the jury is still out on whether the strategy is working.

The business can be successful even if investors aren't

It's clear that Teladoc is expanding its offerings throughout the healthcare system. Through the years, it has built on the basic virtual health platform and added inpatient care, chronic disease management, and both primary and specialty care. It is slowly creating an end-to-end alternative to traditional in-person healthcare experiences. In doing so, it is adding value to patients and providers by increasing convenience and reducing costs. It sounds marvelous. Except it's coming at a price.

The company went public in the middle of 2015, and shares have risen 411% since. And while revenue has jumped 1,400% since 2016, the number of shares outstanding is up 264%. Financials are only available going back to 2013. But the only year the company has had positive operating cash flow was 2019. That means something has to give.

Gorevic and company will no doubt spend the next few years digesting past acquisitions and trying to refine how each service integrates with the others to create a compelling value proposition. If shareholders are going to realize the benefits, some of the top-line growth needs to start paying off. The company has plenty of cash, but Wall Street isn't likely to give it credit for its potential unless it can prove it has a path to eventual profitability. It's just another thing smart investors know and will be looking for in the quarters ahead.