Teladoc Health (TDOC +1.27%) has established itself as a well-known player in the virtual medicine space over the past couple of years. The pandemic caused Teladoc shares to skyrocket nearly 140% in 2020 as stay-at-home orders kept patients from seeing their doctors in person. In 2021, many of these restrictions were lifted, leading people to return to in-person activities. As a result, Teladoc shares are down 75% in the past year.

The Global Telemedicine Market is set to grow at a compound annual growth rate of 26% up to $432 billion by 2030, according to a report published by Allied Market Research. Teladoc's addressable market is massive, but short-term headwinds have caused investors to unload shares of the company's stock. While I believe Teladoc has a very promising future ahead, there are three key risks investors should consider.

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1. Increased competition 

Given its market potential, it’s inevitable that many companies will try to penetrate the telemedicine market. Teladoc faces competition from both traditional healthcare companies like UnitedHealth Group and newcomers like 1Life Healthcare. The company even faces competition from Amazon, which plans to launch its app-based home visits in over 20 cities throughout 2022.

It’s certainly worth noting the fierce competition Teladoc will face in the years ahead; however, it’s a common misconception that competition is bad for companies. In a lot of ways, competition helps expedite innovation and keeps companies from becoming complacent. In Teladoc’s case, the company continues to benefit from impressive growth, as proven by its ability to grow revenue and total visits by 81% and 37% year over year in its most recent quarter. The company also recently announced new partnership agreements to provide its Primary360 healthcare service to the customers of CVS Health and Centene.

The market’s size will allow for many secular winners. If Teladoc can grab just a 5% share of the $432 billion global estimated market for telemedicine, it will generate an annual revenue of nearly $22 billion. This is 1,863% higher than the company’s $1.1 billion in revenue in fiscal year 2020. In order to continue growing its top-line, however, Teladoc needs to increase its customer base in the coming years. That leads us to the next risk.

2. Sluggish paid member growth

Teladoc’s paid member growth has been stagnant so far in its fiscal year 2021. In the company’s third quarter, it only increased its paid members by 4% year over year from 50.3 million to 52.5 million. Management’s guidance for the full year states that paid memberships will end between 52.5 million and 53.5 million, which suggests relatively stationary growth year over year. Teladoc will likely need to improve this metric going forward in order to increase sales and hasten its path to profitability. 

Luckily, the company’s balance sheet places it in an excellent position to grow the business safely. Teladoc’s cash position is robust at $824 million. And with a debt-to-equity ratio of 8%, the company does not need to take on a lot of debt to help fund its growth. As a long-term shareholder of Teladoc, I would like to see its paid membership growth be in the double digit range. That said, its healthy balance sheet and expansion in other areas of the business provide some assurance that future membership growth could accelerate.

3. Long journey to profitability

Teladoc has made great strides in its path to a positive bottom-line. Revenue is expected to come in just over $2 billion for fiscal year 2021, representing 85% growth year over year. The company also continues to vigorously grow its total visits and per member per month (PMPM), which refers to the amount of money received from each individual customer on a monthly basis. Still, Teladoc remains unprofitable, with analysts forecasting EPS in fiscal year 2021 to be -$3.17. Long-term investors will need to be patient provided that most analysts aren’t forecasting a full year of profitability until 2025. 

This may seem far out, but investors who are willing to stay the course have the potential to welcome massive gains. Teladoc’s EPS is also heading in the right direction. Despite its negative forecast for 2021, investors are expecting 41% growth from the company’s -$5.36 EPS in fiscal year 2020. I’m less concerned about Teladoc’s profitability profile given the demonstrated progress it has made in recent years. As a long-term investor, it is more important to understand a company’s broader trajectory than it is to be exactly correct in forecasting the numbers. In Teladoc’s case, the company’s general path to profitability seems convincing.

The overall outlook is still a positive one

Teladoc has exhibited meaningful progress to investors as it looks to become a longstanding industry leader in telemedicine. Still, it would be ignorant to ignore the overt risks associated with the company. More specifically, a rise in competition, static membership growth, and an arduous journey to profitability are three key risks that investors should consider before investing in Teladoc shares. Given the market size and advancements Teladoc has made thus far, I believe the company offers a favorable risk-reward scenario for investors.