If you've ever used telemedicine, there's a good chance it's been provided by none other than Teladoc Health (TDOC 0.05%). With a market cap of around $11.5 billion, the company is a leader in this space, and its meteoric growth during the early phase of the pandemic is no small part of the reason why it's prominent today.
As an investment, the case for Teladoc is quite simple: People who used telehealth during the pandemic are unlikely to want to switch back entirely to in-person care as it's less convenient. Still, it remains to be seen whether a business model like Teladoc's is capable of being successful when costs are high and consumers can freely choose between different modalities and providers.
To understand these issues a bit more, let's examine three things smart investors know -- and that anyone looking at Teladoc should consider.
1. Revenue can keep growing even if membership stalls
For a subscription-based business like Teladoc, the number of subscribers is a key concern for investors. But the company can still make more money even if its base of paying members isn't growing. All that needs to happen is for existing members to expand their use of paid services. And that's exactly what's happening.
At the close of 2021, Teladoc had around 76.5 million subscribers, per management's estimates, which should have brought in roughly $2.03 billion in revenue. In contrast, in 2020 there were 73.1 million subscribers, which accounted for $1.09 billion in sales. Income per member per month increased significantly from $1.22 in 2020 to $2.57 in 2021, which bodes well for the company's future.
In a nutshell, smart investors understand that Teladoc's headliner telehealth solution is just a way to get subscribers in the door. Once they're on board, they can be upsold for additional services, such as mental health counseling or weight management subscriptions. And that's why slowing of membership growth shouldn't be a major concern.
2. Competitors are starting to assert themselves
The telehealth space may not have been very crowded when Teladoc first entered it, but now there's a handful of other players. Smart investors recognize that the telehealth industry is in the midst of a gold rush, and that means there are going to be a lot of competitors panning for the same people seeking care.
Some of these competitors, like Talkspace, focus exclusively on submarkets within telehealth where Teladoc also competes, such as behavioral health. Others, like GoodRx, offer telehealth consultations for primary care and medication management, among other services tailored to price-sensitive consumers. Both companies stand to steal market share from Teladoc. And they're not the only ones -- nor are they going away anytime soon.
Investors don't need to be scared of the space starting to fill up, at least not yet. For a company like Teladoc with more than $826 million in cash, the presence of smaller players means a plethora of targets ripe for acquisition.
3. The company is not yet profitable
One thing that savvy investors are probably a bit concerned about is Teladoc's profit margin. It isn't yet profitable. Its gross margin is currently resting at 67.6%, but that has trended downward over the last five years.
If the business is ever going to repay its investors, the margin will need to improve substantially so as to eventually create robust cash flows. So far, progress has been slow. Over the last three years, its cost of goods sold and total expenses have both only slightly receded as a percentage of quarterly revenue.
The more time that passes, the more pressure there will be on management to show that the company is able to sustain itself without injections of outside capital. In a worst-case scenario, Teladoc might struggle to trim its costs or increase its profits for several more years, hemorrhaging cash while accumulating more debt. That probably won't come to pass, but investors should keep a close watch on earnings to be sure.