After a few years of experimenting with its own employees, it appears Amazon (AMZN -1.53%) is closing down its telehealth service, Amazon Care, by the end of 2022. Though the U.S. spends over $4 trillion a year on healthcare, disrupting this massive sector of the economy is incredibly difficult. For example, Amazon has already had other failures in this space -- like healthcare start-up Haven, which was also backed by JPMorgan Chase and Warren Buffett's Berkshire Hathaway.
With Care closing, it appears Amazon will attempt a different angle. It's still in the process of acquiring 1Life Healthcare (ONEM), the parent company of primary care clinic chain One Medical. Amazon is also reportedly interested in bidding on analytics and healthcare payments platform provider Signify Health. Amid this suddenly convoluted strategy to retool at Amazon, telehealth leader Teladoc Health (TDOC -0.91%) is beaten up but still standing. Is it time to buy Teladoc?
Amazon was never Teladoc's biggest problem
I must first confess I was wrong about Teladoc, at least in the last year or two. I bought my first batch of shares back in 2017 and was pleased for a few years that I had gotten in early in a compelling growth story within the healthcare technology space. Then 2020 happened and virtual at-home care suddenly went mainstream. Teladoc stock exploded higher, and then it used its strength to acquire digital chronic care company Livongo Health. I applauded the deal, but it's been all downhill since then. Teladoc realized a $3 billion goodwill impairment charge in Q2 2022 associated with the acquisition. In other words, Teladoc overpaid for Livongo.
As the effects of the pandemic have worn off, Teladoc's growth rates have slowed. Through the first half of 2022, revenue is up 21% year over year to $1.16 billion. And for the full year, management expects growth to be up at least 18% compared to 2021. It's seeing strength in its primary care and mental health services, but CEO Jason Gorevic pointed out two issues dragging down near-term expectations -- and neither of them were Amazon.
First, Gorevic said economic uncertainty is slowing the pace of new deals Teladoc is working on to onboard new members. With the U.S. Federal Reserve hiking interest rates to try and tame inflation, businesses are taking a closer look at expenses. As indicated on earnings calls in recent months, cloud computing is exhibiting relative strength. It has a quick turnaround on payoff, so businesses aren't in a hurry to cut their budget for next-gen IT infrastructure and software. But new healthcare plans are a different story. Businesses are tightening their belts and some are even laying off employees. New healthcare services for the workforce are being put on the back burner for now, it would seem.
And second, Gorevic did point out that competition is posing an issue, but it's not the kind of competition we might think of. He explained: "We still see smaller private competitors pursuing what we believe are low or no return customer acquisition strategies to establish market share. Although we do not see this as sustainable, it's difficult to predict how long this dynamic may continue."
Basically, when the pandemic hit, a slew of new start-up competition entered the telehealth market to get a cut of the action, and many of those smaller peers are still trying to establish a foothold even as telehealth cools off. It would seem even Teladoc got ahead of itself. Gorevic added that the yield on its advertising spend efforts has been in decline lately, so the company will be paring back some of that new patient advertising budget later this year.
In a nutshell, disrupting the healthcare space is hard -- for tech giants like Amazon, and for well-established tech leaders within the healthcare arena like Teladoc. Amazon closing up its Care service is no reason to buy Teladoc stock.
The good news Teladoc has going for it
Despite issues for growth companies right now, there are some bright spots. Teladoc is still growing, and it generated a free cash flow of $107 million over the last 12 months ended in June. On an adjusted EBITDA basis, management expects to generate at least $240 million for fiscal year 2022, which implies an adjusted EBITDA profit margin of about 10%. This is no cash-generating machine, but it's a start.
Teladoc's U.S. paid membership is also climbing again. It reported 56.6 million members in Q2, up some 2.4 million members compared to the first quarter. Gorevic also said on the earnings call the company has twice as many multimillion-dollar deals in the works than it did last year, although progress on said deals is slow. The company has also stepped up its spending on research and development to help promote growth later on as Teladoc focuses on whole-person virtual care solutions.
There are imperfections with Teladoc's business to be sure. But shares now trade for just 2.4 times enterprise value based on the low end of expected 2022 sales, and 24 times enterprise value based on the low end of expected adjusted EBITDA. If Teladoc can hold on to its dominant position in the telehealth space and keep up its modest rate of growth, shares could be a bargain right now -- regardless of what Amazon decides to do next in the massive U.S. healthcare industry.
