With Teladoc Health's (TDOC 0.32%) stock price down by more than 70% over the past 12 months, shareholders are likely to be searching hard for any reasons for optimism. To that end, the telehealth company's rising sales serve as a bright spot. In the third quarter, its revenue grew by 81% year over year to $522 million, and investors are likely to see more big growth when it reports on Q4 in February.
But how much does a rising top line matter if the stock keeps tanking all the while?
With rapid growth over, pressure is on to raise earnings
Teladoc offers telehealth as a service. People who subscribe to it can book remote visits with the clinicians contracted by the company. Once the visit is complete, it can bill the patient's insurance if necessary and reimburse the clinician accordingly. Beyond its individual customers, Teladoc's clientele also includes health insurers, healthcare systems, and employers looking to beef up their healthcare offerings for employees.
In 2020, its total membership topped 73 million people, for whom it facilitated a total of 10.6 million telehealth visits throughout the year. With one quarterly release left to come for 2021, the company is expecting to report that it ended the year with 76.5 million subscribers and more than 14.7 million telehealth visits. Back in 2019, it only had 56 million members who collectively attended 4.1 million visits.
The pandemic, of course, has played a major role in juicing the company's membership numbers, not to mention its revenue. Since January 2020, quarterly revenue is up by 233%. Management now expects to report that it brought in about $2 billion in 2021 and is guiding for a top line as high as $2.6 billion in 2022. If these predictions prove correct, revenue growth will still be strong even if it will continue to decelerate slightly.
Why it might be better to avoid buying this stock for now
Given that people's desire to use telehealth services is unlikely to evaporate, all of the above looks quite positive for the stock's future prospects. There are, though, a couple of issues that might propel shares even further downward.
First, membership growth will not return to its early pandemic pace when millions of people were seeking ways to get medical assistance without going to doctors' offices. Second, Teladoc isn't anywhere close to being profitable. And since January 2020, its expenses have actually risen slightly as a percentage of its quarterly revenue.
None of these problems is insurmountable.
Management is planning to increase its average annual revenue per subscriber by as much as 25% by offering a wider range of services, potentially including remote monitoring of a patient's medical sensors. And it can probably keep growing its membership base by a few percentage points per year even though the pandemic-powered surge is over.
In addition, its costs of providing service are dropping, albeit slowly. Over the past three years, Teladoc's cost of goods sold has fallen as a percentage of its revenue, and its quarterly gross profits have risen by 320%. Therefore, it's likely that the company will eventually reach profitability simply by continuing to do what it has been doing -- even as it continues to increase its revenue.
The right time to buy might be approaching
As of now, Teladoc trades below where it began 2020 -- before COVID-19 really put the company on the map. But it won't keep going down forever. Eventually, perhaps as a result of a strong earnings performance, its share price will return to growth. There's no way to know exactly when the best moment will be to buy shares, but it may be soon.
The business will report its full-year earnings for 2021 in late February, and the market will be looking to see whether its membership growth and revenue figures are in line with what management predicted a year ago. Even if that report shows that the financial metrics are still trending favorably, it would probably be prudent to wait for the stock to stop shedding value steadily before making a purchase.
On the other hand, if you're feeling daring, investing today might produce the largest gains once Teladoc shares do start to rise again.