The past three years have been a roller-coaster ride for Teladoc Health (TDOC -2.40%). The company initially rode a pandemic-induced high when its business was in high demand, but the telemedicine specialist has since lost much of that momentum -- along with the associated stock market gains.
However, Teladoc isn't dead in the water yet, although for many investors, its prospects look somewhat shaky. What will happen to the company throughout the next five years? Let's try to figure it out.
The telemedicine market should keep growing
The traction the telemedicine market gained during the early pandemic years may have slowed, but the entire industry should continue going up. There are several pieces of evidence for that.
First, Teladoc Health's financial reports indicate it is still making headway. In the third quarter, the company's total members across all three of its major segments -- U.S. Integrated Care, BetterHelp (for therapy services), and Chronic Care -- all moved in the right direction, just as they have been doing for several years in a row now. U.S. Integrated care members increased by 10% year over year to 90.2 million, while BetterHelp and Chronic Care saw year-over-year growth of 5% and 13%, respectively.
Second, various polls have shown that patients are generally satisfied with telehealth services and plan to continue using them. For instance, healthcare-focused IT company Phreesia conducted a survey of about 2,000 patients in 2022 that found that of the 36% of them who had a telehealth visit in the six months prior on the company's platform, 71% were very or extremely satisfied.
Further, 84% expressed moderate to high enthusiasm at the idea of another telemedicine call within the following 12 months. Patients particularly enjoyed the flexibility and convenience the service offers.
This brings us to the third point. Having a visit with a doctor from home beats traveling several miles to do the same thing. Convenience is always a great selling point, and telemedicine provides that.
These factors (and others) make a strong case for why telehealth will gain even more adoption in the next five years. That also matches analysts' projections. Estimates vary (as always), but some see the market registering a compound annual growth rate of 24.3% through 2030. That should provide a nice tailwind for Teladoc, one of the leaders in this field.
Will Teladoc become profitable?
One of the issues investors have with Teladoc is that it remains unprofitable. And since the company's top-line growth has slowed in the past few years, many don't see a path to profitability. In the third quarter, Teladoc's revenue of $660.2 million increased by 8% year over year.
TDOC Revenue (Quarterly YoY Growth) data by YCharts
The company's net loss per share of $0.35 was better than the $0.45 loss per share reported in the prior-year quarter. That's the good news: The bottom line is moving in the right direction. But can it turn green in the next three years?
On the one hand, Teladoc's gross margins are strong. It had an adjusted gross margin of 71.8% in the third quarter, compared to 69.9% in the parallel period of the previous fiscal year.
The problem is that Teladoc's expenses are too high, especially those related to advertising and marketing (its largest category of expenses right now). These costs should decline as Teladoc becomes better established and needs to spend less on advertising. The question is whether revenue growth will keep growing fast enough -- while marketing expenses decrease enough -- in the next half-decade for the company to turn a profit. In my view, that seems highly plausible.
Is Teladoc a buy?
Teladoc stock has been hammered recently. And although the company's issues are undeniable, the sell-off still looks overdone. Teladoc isn't worse off than before the pandemic started, yet its share price and market cap are substantially below what they were then.
Perhaps that only reflects the fact that, at the time, Teladoc was overvalued. But that no longer seems to be the case. As of this writing, Teladoc's forward price-to-sales ratio is a mere 1.19 -- the undervalued range is usually under 2.
Teladoc looks like a solid buy at these levels. The investment won't pay off overnight, but for patient investors willing to hold their shares for the next five years and beyond, it should eventually.
