For the full fiscal year ended Dec. 31, 2020, Teladoc Health (TDOC 0.50%) saw its revenue soar by 98% as it quickly became a household name and a COVID stock darling. As a result, the company's stock price soared by over 130% from January 2020 to year end in December. This increase was far and away higher than the S&P 500's return of 18.4% during the same period. However, 2021 has been a different story.

Teladoc stock has been trading in a downward spiral, and now it's 68% off its highs. Furthermore, as investors rerate risk and consider potential interest rate hikes and inflation concerns, some may be selling in an effort to move toward cash. These dynamics have led to valuation compression across the broader market. However, there are some investors who are viewing these pullbacks as an opportunity to buy. Let's dig in and find out if this decline is warranted, or if this represents an opportunity to buy a great growth stock at a discount.

A person receives a virtual health consultation on a tablet.

Image Source: Getty Images

Revenue growth is stalling

For the fiscal year ending Dec. 31, 2020, Teladoc posted revenues of $1.1 billion, which represented 98% year-over-year growth from 2019. Since then, however, the company's revenue growth has started to stall. For the first nine months of 2021 Teladoc generated a whopping $1.5 billion in revenue, but quarterly sequential growth narrowed. The company's sequential growth rates are as follows for the last three quarters: 18% from Q4 2020 to Q1 2021, 11% from Q1 2021 to Q2 2021, and 4% from Q2 2021 to Q3 2021. Management's guidance for Q4 2021 revenue is $536 million to $546 million.  This represents another 4% sequential quarterly growth at the midpoint. Should Teladoc hit its guidance, the company will be on track to eclipse $2.0 billion in total sales, representing full-year growth of over 80%.

At first glance, a growth-oriented investor may balk at a company with contracting sequential revenue progress. However, if we take a deeper look at the key performance indicators, I think that the slowing revenue growth should be expected. For the year ended Dec. 31, 2020, Teladoc witnessed 41% growth in its paid membership and 156% growth in total visits. This level of growth is unsustainable, especially for a company that was undoubtedly fueled by the pandemic. For reference, the company is guiding for only 2% growth in paid membership in 2021 and roughly 40% growth in total visits. I think that if we take the context of why Teladoc's business experienced such an influx in 2020, it may become more clear that it is returning to pre-pandemic levels of growth. However, even with this slowing growth profile, I do not view the future potential of the business as risky. Some large institutional investors agree and have viewed the declining share price as a long-term buying opportunity. 

Institutional investors buy the dip

Since Teladoc's Q3 earnings in late October, famed technology investor Cathie Wood has been purchasing shares. Teladoc represents a top-10 position in each of the following ETF's managed by Wood: ARK Innovation ETF (ARKK -1.15%), ARK Next Generation Internet ETF (ARKW -0.69%), ARK Fintech Innovation ETF (ARKF 0.04%), and ARK Genomic Revolution ETF (ARKG -2.83%). Teladoc is the number one holding in the ARK Genomic Revolution fund.

Despite contractions in technology stocks in 2021, each of these funds has handily topped the S&P 500 over a five-year time horizon since their respective inceptions. As an investor, I am impressed by Cathie Wood's investment prowess and her ability to identify innovative leaders across different industries. For this reason, I am encouraged that Wood has been adding shares of Teladoc across her portfolio and using the company's declining stock price as a buying opportunity.

It is important to keep in mind that we should not always follow the movements of larger institutional investors. However, Wood's thesis around Teladoc is rooted in artificial intelligence and the increasing importance of data. She has specifically referenced Teladoc's acquisition of Livongo in October 2020 as a savvy business combination, because the pro forma entity now serves both the acute health and chronic side of the health spectrum, providing Teladoc an opportunity to amass even more data from its growing membership base. Teladoc should be able to leverage that data to hone existing and create new innovative products and services as it redefines the healthcare ecosystem.       

Now what?

As an investor, I think it's important to zoom out. Teladoc marries two industries that are always innovating: technology and healthcare. When we look at the broader sales picture, 80% year-over-year revenue growth is still very impressive. This growth has been fueled by increases in the company's member base and total number of virtual consultations.

I think that it is fair to say that the company's level of growth during 2020 was unsustainable. However, this growth allowed Teladoc to take advantage of the influence that the pandemic had on markets and specific industries, culminating in its acquisition of Livongo last year. Although the benefits of this acquisition have not yet generated early COVID-era-level growth, I view the future potential of the business positively. With investors like Cathie Wood continuing to invest in Teladoc for the long-term, I feel more validated buying at these low points. Teladoc may be worth a look for your portfolio if you are looking for exposure to innovation and the future of healthcare.