Many would argue that searching for 100-baggers -- stocks that return $100 for every $1 invested -- is as likely as winning the lottery. It definitely requires some luck. But not that much. Focusing on a few attributes of a business can dramatically increase the chances of life-changing returns. But those same attributes can increase the risk of underperformance or even collapse. That's why trying to find them makes sense as part of a diversified portfolio.
I think Teladoc Health (TDOC -2.40%) has the potential be a 100-to-1 investment for those willing to hold their nose after a 90% drop in the stock price. The company is finally working through its COVID hangover, and the key ingredients are all there for those with a little luck and a lot of patience.
Start small and wait a long time
Asked to name the best investments of the past three decades, many will undoubtedly come up with Apple, Amazon, and Microsoft. Some might even be aware that Monster Beverage has delivered an absurd $3,900 for every $1 invested in 1990. But how many would be able to name UnitedHealth Group or Roper Technologies? Or there's Paychex, Texas Instruments, and Cisco Systems -- companies with stock prices that have grown between 80 and 200 times in value.
The lesson here is that it more companies than you think can grow your investment 100-to-1. It just takes a long time for compounding growth to produce those returns. Specifically, a company needs to grow about 20% annually for 25 years, or more than 16% for 30 years. Reversing the math, it also means investing when the company is small. With a market capitalization of $4.5 billion, Teladoc isn't small. But it is a pipsqueak in the market it is trying to address. That could allow it to grow at the rates above for the decades needed.
A large market to grow into
The U.S. healthcare landscape has been in a constant state of change over the past decade. Health systems, insurance companies, and the government are all trying to find ways to deliver better care at a lower cost. Gross spending by Medicare in fiscal year 2022 was almost $1 trillion. A subset of patients with multiple chronic conditions made up 93% of that spending. Teladoc has that population in its sights.
This graphic from a management presentation to analysts at the beginning of 2022 shows its move into chronic care management (CCM) has plenty of room for growth to take advantage of that massive opportunity.
Image source: Teladoc Health.
A business model that scales
To address the needs of patients with chronic health issues like diabetes, Teladoc purchased Livongo Health in 2020 for $18.5 billion. That exorbitant price tag has wreaked havoc with the company's financials -- especially its profitability. But the impact is finally starting to fade. After posting negative earnings before interest, taxes, depreciation, and amortization (EBITDA) every year, it is projecting close to breakeven in 2023. That won't cut it over the long term, but it is progress.
Teladoc will face fierce competition as giants like Amazon and UnitedHealth Group continue to develop their own virtual health offerings. But the winners won't be determined by size. They will be the companies that provide value in the form of better outcomes and lower costs. That requires end-to-end services that use data effectively. Teladoc has paid a steep price to stitch together that kind of platform. If it can prove itself to those footing the bill for escalating healthcare costs, shareholders could end up big winners.
