The bear market we experienced last year was especially harsh. The otherwise high-flying but unprofitable growth-oriented companies that performed well during the pandemic (sometimes called "pandemic stocks") did not have a great year either. Telehealth specialist Teladoc (TDOC 3.31%) is a corporation at the intersection of these two categories, so it isn't surprising that its shares were hammered in 2022.
But there are excellent reasons to be a shareholder in Teladoc. The company could eventually turn things around and possibly deliver market-beating returns. Here is why this company is worth investing in, especially at its current levels.
The path to profitability
Teladoc experienced a hard year in 2022, partly due to massive net losses associated with impairment charges linked to the company's acquisition of Livongo Health back in 2020. Even putting that aside, though, the company still isn't profitable. The company's net loss in the third quarter -- when it did not report significant impairment charges -- was $73.5 million, slightly better than the $84.3 million net loss reported during the year-ago period.
Improving the bottom line will be important for Teladoc. The company has been pouring money on various initiatives, particularly marketing efforts that haven't yet paid off in the way it expected. We can see this with Teladoc's mental health service BetterHelp, where the company reports that yield on advertising remains below what it had anticipated, partly because of competition from smaller providers.
Still, BetterHelp has been growing rapidly. The company projected over $1 billion in revenue from BetterHelp in 2022. Compared to about $700 million in 2021, representing year over year growth of about 42.9%, much faster than the rest of the company's business. BetterHelp's growth is due to several reasons. First, even before the pandemic, many of those who needed mental healthcare were not receiving it.
Second, the outbreak exacerbated mental health problems worldwide. Marketing its BetterHelp platform, which typically offers therapy and counseling at a fraction of the price traditional on-site providers do, has helped Teladoc raise awareness of this issue Teladoc can eventually turn a profit if its marketing efforts with BetterHelp and the rest of its business pay off, especially considering the company's rather strong gross margins.
Data by YCharts.
Further, the company recently announced efforts to reduce expenses by reducing its workforce (among other initiatives), a common move on Wall Street these days. That could help Teladoc improve the bottom line too. And on the other hand, there remains plenty of room for the company to make headway and grow its revenue faster than its expenses in the telehealth market.
Still a young industry
Telemedicine wasn't created in 2020, although the pandemic accelerated its adoption. Even so, the sector still has plenty of growing to do. According to analysts with Fortune Business Insights, the telehealth industry is expected to grow at a compound annual growth rate of 32% through 2028 and be worth $636 billion by then.
Reasonable financial projections can only look so far ahead. And even beyond this timeframe, we can expect telemedicine to grow in prominence thanks to the perks it offers patients, including convenience and cost savings. Teladoc's BetterHelp is an excellent example, as it allows those seeking therapy to access it from the comfort of their homes on multiple platforms (via phone calls, text messages, and video conferences) and at lower prices.
The future of telemedicine is a great reason to buy Teladoc's shares. The company is a leader in the field and is building a competitive advantage that relies on the network effect, where the value of a service increases as more people use it. How does this apply to Teladoc? Patients and third-party payers, such as insurance companies seeking a telemedicine platform, will want to join an ecosystem where a wide variety of healthcare providers offer as many specialties as possible.
And the more clients enter the ecosystem, the more attractive it becomes for other physicians and providers looking to offer their services via video conference. With over 10,000 providers and 12,000 clients (including institutional customers), Teladoc is a market leader. And it is likely to continue its reign at the top thanks to its network effect.
The company's shares are changing hands for about $25 apiece, which is near the low end of its levels over the past five years. And with a forward price-to-sales ratio of just 1.7 (anything under two is generally good), Teladoc doesn't just look cheap on a price basis; it also looks attractively valued. Opportunistic investors would do well to load up on this company's shares.
