Teladoc Health (TDOC -2.91%) investors may want to start thinking about heading to the door. To be clear, there's no breaking news here that warrants a sale this very minute. But the telemedicine and virtual healthcare specialist's now years-long struggle to provide a return is getting tougher and shareholders are losing patience.
Teladoc's already stagnating growth might soon slow further as powerful competitors start to enter its market with gusto. And to make the matter a bit harder, many of its shareholders are sitting on losses that are likely too deep to overcome anytime soon. Continuing to hold on to this stock means these shareholders probably won't be able to bring the remainder of their holdings in this stock to bear on faster-growing companies in the run-up to the next bull market.
Here's an in-depth argument for why it's worth thinking about selling your shares.
Don't expect another wild run-up
There are a few reasons why one might want to offload their Teladoc shares, starting with the fact that some of its shareholders purchased the company during a time when expectations for its performance were a bit different and perhaps a bit out of touch with what would be considered reasonable.
Though the stock has been public since 2015 and it has retained roughly the same general growth thesis pointing to the proliferation and profit-making potential of various telehealth services, 2020 and the early part of 2021 saw Teladoc's shares soar as millions of people got access to its telehealth services for the first time during the pandemic. The company took full advantage of the opportunity, growing its quarterly revenue by 252.7% over the last three years.
The pandemic likely pulled forward a huge amount of the company's growth runway by creating pressure for consumers to adopt telehealth, leaving it with little of its original market left to penetrate. But since hitting all-time highs in early 2021, its stock is down nearly 92%, and it isn't likely to make up that lost ground anytime soon, as the conditions that drove its rise were rare and unlikely to happen again anytime soon.
There probably won't be another pandemic on the scale of the current one that will force people to use telehealth services for the first time again. Much of Teledoc's potential market is now familiar with the concept and is likely using telehealth to some degree already if they were interested in doing so. Likewise, the growth-stock mania that characterized the first two years of the pandemic is definitively over.
Slowing growth and continued losses are discouraging
Clearly, the pandemic had a huge positive (and now negative) impact on this stock. But there are also a couple of factors that might encourage more recent purchasers who bought the discounted stock hoping to catch the next wave of growth to now quit their positions.
One troubling factor is the company's slowing growth. Management's revenue guidance for 2023 calls for a maximum of 11% top-line expansion, reaching $2.6 billion. That's a notch down from the pace of 2022's 18% revenue increase. On the low end of 2023 guidance, management forecasts its revenue could rise by 6% with its subscription totals increasing by as little as 1%. That level of growth is hardly fast enough to satisfy the growth-stock investors out there.
Sales growth under 10% per year is a pace more appropriate for a mature business, and there isn't much in the way of a plan by management to return to rapid growth, though diversification into chronic care management using embedded medical sensors used by patients may allow the current rate to be sustained for a (possibly long) time. Once again, the pulling forward of the company's growth during the pandemic appears to be a major near-term and perhaps medium-term drag on the stock.
While slowing top-line growth is a real concern, Teladoc's issues with its bottom-line losses are a real and longer-term concern for investors. They are also a likely reason so many are giving up on the stock. Its quarterly gross margin of 70.4% as of the end of 2022 is a mere 0.5% better than what it was five years ago. And Teladoc management expects the company will be unprofitable through 2023 (and perhaps beyond) despite registering free cash flow (FCF) of $11.6 million in the fourth quarter of 2022 -- less than the $14.7 million in FCF it had in the quarter three years prior to that.
It isn't getting significantly more efficient over time despite a massive scale-up and having several years to reduce its costs. Its total quarterly expenses are 104.5% of its quarterly revenue, which has only marginally changed for the better over the last three years. That's a major concern for long-term investors, as it may be the case that Teladoc's business model is not capable of being a profitable one in its current form. And in the context of a bear market, its ongoing unprofitability makes its share price downwardly mobile as investors flock to safer and more established companies.
Competitors are moving in and applying pressure
A big problem on Teladoc's profitability front is the increasing threat from competition. Per a report by Grandview Research, the overall telemedicine market was worth $70.4 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 19.5% from 2022 through 2030. All that potential is drawing others into the market.
Efforts by companies like CVS Health, Doxy.me, and American Well Corp. (Amwell) to get into the telemedicine market and steal share necessitate increased spending on marketing. For 2022, Teladoc spent $850.7 million on sales and marketing. That budget was actually bigger than its cost of revenue (i.e., its production costs), which was $743.9 million. Put differently, the company spent more money in 2022 on trying to get new subscribers onboarded to its platform than it spent employing a myriad number of doctors and other specialists to service these subscribers.
Healthcare behemoths like CVS Health joining the market mean Teladoc will have to invest more to effectively compete, and these bigger companies tend to have far more resources to draw on than Teladoc. As a result, Teladoc investors can reasonably expect marketing costs to rise, which won't help Teladoc's profit margin or share price.
Your money might grow faster elsewhere
Despite all the problems Teladoc faces, investors should remember that things aren't completely bleak for the business. It could raise prices for memberships or ostensibly find ways to squeeze more money out of each subscriber per quarter by upselling them on new services. And with $918.1 million in cash on hand, Teladoc won't be running out of money anytime soon, as it can always choose to slash its marketing budget. Management's plan is to try to balance the company's efforts between chasing further growth and improving its margins, which probably means that it won't become profitable in the near term, nor will it grow quickly if the costs of doing so would be major.
Nonetheless, with powerful competitors rearing their heads and no obvious new big spark for another big bull run, long-term investors have a big question to consider right now: Should they liquidate their shares, eat the losses, and put what's left toward a company that's going to be growing faster to hopefully get a larger portfolio boost during the next bull market? Or should they remain patient and keep holding onto their shares for a few years more in hopes of Teladoc getting back on a growth track?
In my view, it's best to sell the stock, as its core business model hasn't proven itself to be sustainable in the long term. But, if you have a higher risk tolerance than I do, it's reasonable to hold onto your shares for a bit longer. Just be aware that the factors that could drive Teladoc's run-up in the next bull market are likely to be very different and based around its actual bottom-line performance, unlike in the last bull market.
