One of the constant themes of the COVID-19 pandemic has been learning how to perform basic needs remotely. From in-home workouts like Peloton to virtual learning environments on Chegg, society has learned to adapt to remote platforms.
Perhaps one of the biggest beneficiaries of this dynamic is the healthcare industry. Teladoc (TDOC 3.31%) offers virtual healthcare services domestically and abroad. Over the last two years, the company has seen its stock price skyrocket, peaking at over $30 billion in February 2021.
Nearly one year later, the company's market capitalization is down to less than $9 billion. Yet, there are a number of factors -- both specific to Teladoc as well as the telemedicine industry more broadly -- that make the stock compelling at its current valuation.
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Don't miss the forest for the trees
For the year ended Dec. 31, 2021, Teladoc generated $2 billion in revenue, up 86% year over year. Although the level of growth is impressive, the company's stock price has been in a downward spiral, cratering over 40% year to date. Some investors may cite the company's slowing top-line growth and lack of profitability as concerning. However, it is important to zoom out and think about the bigger picture when assessing growth-stage companies.
In 2020, Teladoc reported revenue of $1.1 billion, up 98% from 2019. Even though Teladoc's 2021 revenue growth of 86% is less than its 2020 levels, it is still very impressive. The company will not be able to sustain this level of growth in the long term. Management is aware of this and has done a solid job communicating to investors. During its fourth-quarter 2021 earnings call, Teladoc's management highlighted that the company is projecting more normalized revenue growth of 25% to 30% in 2022.
Additionally, since Teladoc has benefited greatly from the pandemic, it is a bit shortsighted to be alarmed by Teladoc's current revenue trajectory. The increase in the top line is outpacing its expense growth, thereby helping Teladoc trim its net losses and form a more viable path to profitability. In 2021 Teladoc reported a net loss of $428.8 million, which would be a year-over-year improvement of roughly $56 million.
Competition is falling behind
Two of Teladoc's primary competitors are SOC Telemed and American Well, both of which have struggled to keep up with Teladoc.
SOC Telemed was taken public through a special purpose acquisition company in November 2020. According to its third-quarter 2021 earnings release, the company's stand-alone revenue per consult decreased from $449 to $428 year over year, despite having an 18% increase in the number of consultations.
Additionally, management slashed its current estimate for full year 2021 revenue to $91.5 million to $93.5 million, down from its estimate of $107 million to $113 million in June 2021. It may be no surprise that SOC Telemed's stock price eventually fell below a dollar a share, and it recently announced that it was going to be taken private by Patient Square Capital.
Another competitor to Teladoc is American Well. For 2021, American Well reported revenue of $253 million, up 3% year over year, and it expanded its gross margin from 36% to 41%. Management estimates 2022 total revenue of $275 million to $285 million, which would represent 11% growth at the midpoint. Although American Well is growing its top line while also expanding its margins, the company's revenue base is only about 12% of that of Teladoc.
American Well may be operating a decent operation, but the company has a lot of work ahead if it wants to catch up to Teladoc, which is growing at a far greater velocity and making key long-term investments that are yet to be fully baked in.
Patience and long-term mindset are key
Teladoc has made a number of strategic moves over the last two years. However, several of these developments are yet to contribute to Teladoc's business in a meaningful way since the company is still implementing them.
In late 2020, Teladoc finalized its deal to acquire Livongo for $18.5 billion. Thinking about it another way, Teladoc is currently trading for less than what it paid for Livongo, let alone the theoretical valuation of the pro forma entity after accounting for synergies.
Although Teladoc does not break out revenue specific to Livongo, the company notes in its 10K filing that roughly $500 million of its $2.0 billion 2021 revenue is attributable to acquisitions. Given that Teladoc spent the last year integrating Livongo into its core operations, investors should exercise some patience as the future growth potential of the combined business could very well carry upside.
Another interesting development is Teladoc's relationship with Amazon. The company recently announced a partnership with Amazon involving its voice-enabled consumer electronics device, Alexa. Although it can be difficult projecting future revenue from this relationship, the underlying theme is that Teladoc can now be exposed to anyone with Alexa-enabled devices, thus expanding its serviceable market.
Teladoc hit a fresh 52-week low on Friday. Despite the volatile market conditions, Teladoc has a lot of levers it can pull to fuel growth. The company is outpacing its primary competition, and large technology behemoths are choosing Teladoc to help build and expand into new markets. The company's revenue generation is robust, and its net losses are narrowing. If Teladoc can execute on its roadmap and prove that it can continue trimming losses and approach profitability, it could be worth a long-term position in your portfolio.
