It's definitely pretty convenient to have a doctor a phone call away, but that doesn't necessarily make for a good investment. You're probably familiar with Teladoc Health (TDOC -2.91%) thanks to its massive pandemic-era scale-up, during which its telehealth service became a lifeline for many people who needed medical care but couldn't make it to their doctors.
But now that the gold rush into telehealth is in the rearview mirror, its prospects are more uncertain than before. So is Teladoc a stock you should be rushing to buy, or is it actually an investment that you might want to think about selling?
A thesis for buying the shares
Teladoc's business model is, in theory, capable of being a big moneymaker over the long haul. In short, its telehealth clinicians provide on-demand primary care, behavioral health, and even some modalities of chronic care and specialty care, all for a recurring membership fee that's often paid by a patient's employer or their health insurance.
Ideally, its fees would cover the costs of utilizing the time of all those (pricey) experts and keeping them on call, plus a little bit extra to profit. Then, Teladoc could drive profitable top-line growth by expanding its membership base, or by offering new services to subscribers for additional costs, thereby increasing the amount of money it makes from each person that's covered.
As there's little indication that telehealth services are getting any less popular over time, Teladoc's primary concern would be to guard its market share against competitors offering similar services, preferably by developing a competitive advantage of some kind, or perhaps a care ecosystem that encourages customers to stay locked in. And after that, shareholders could sit back and collect the returns for years -- sounds pretty sweet, right?
The trouble is that while that dream is still alive in the sense that the company isn't about to go bankrupt or give up on executing its vision, the flourishing state described above is still just as much of an illusion today as it was a few years ago. And that is a problem for those considering an investment, regardless of the state of the market.
There's no rush to buy
Because the pandemic pushed so many people into using telehealth, further membership growth after the massive influx has been somewhat slow in comparison, with Teladoc's subscriber base for its integrated care service increasing from 77.5 million people about a year ago to 83.3 million last quarter. Revenue rose by 15% to $637.7 million in the same period. But the company's still unprofitable, and management is anticipating that top-line growth will be slower this year, as will the growth of its membership base.
Plus, it's making around $1.44 per member per quarter as of Q4, which is ever so slightly less than the $1.46 it made a year ago. Given that Teladoc's quarterly gross margin is actually improving somewhat over the last three years, that small decline isn't an actual problem, it's just a sign that progress is slow, and it isn't occurring as management would probably hope.
So Teladoc is growing while its margin slowly widens. But that hasn't been enough to please the market during the downturn, with its shares crashing by 55% in the last 12 months alone. While its unprofitability is likely to blame, the fact that the business doesn't yet have any evidence of developing a competitive advantage is a much larger issue. As things stand currently, there's nothing to stop its competitors among the major insurance companies from undercutting it and using their tremendous resources to starve it out; nor is there much reason for subscribers to flock specifically to its platform.
That could well change with time, and there's no disputing that Teladoc is making headway. But so long as progress is as slow as it has been in the last couple of years, there's no reason to rush to buy its stock in advance of a new bull market, and it's probably the right move to hold off on a purchase altogether. If it can somehow accelerate its efficiency improvements or its top-line growth -- neither of which is anticipated in 2023 -- the picture might change.
But for now, investors might even consider selling shares rather than a purchase.
