Castlight Health (NYSE:CSLT), which makes cloud-based tools for health care cost management, recently partnered up with Teladoc, the largest telehealth provider in the U.S. The partnership will allow Teladoc to offer its telehealth services, which cover over 8 million members, through Castlight's cloud-based suite to businesses which are signed up with both companies.

Castlight's tools help self-insuring businesses and their employees cut health care costs by narrowing down the best costs for medical procedures and treatments. There's certainly a growing market for this kind of service -- employer insurance contributions have risen 32% over the last five years, and Castlight claims it can cut employee health costs by $10,000 per worker.

Source: Castlight Health.

Yet the market hasn't been kind to Castlight since its IPO in March. The stock was originally priced at $16, soared to nearly $40 immediately, then tumbled back down to around $14.50 over the past four months. Let's see if Castlight's new telehealth partnership can help get it back on track, and what other challenges the company could face in the near future.

A tiny business with a massive valuation
One of the biggest concerns about Castlight is its valuation. At its current market cap of $1.3 billion, it trades with a price-to-sales multiple of 67. Last quarter, the company generated $8.4 million in revenue. That was a 339% year-over-year increase, but hardly impressive considering its operating loss more than doubled to $24.3 million. Last year, Castlight posted $13 million in revenue, but its operating loss was five times its revenue in size. Castlight also doesn't expect to be profitable this year.

To put that valuation into perspective, we can compare Castlight to Veeva (NYSE:VEEV), a cloud-based analytics company which helps pharmaceutical companies with CRM (customer relationship management). Veeva currently has a market cap of $3 billion, and it trades with a price-to-sales multiple of 13. Its revenue rose 56% year-over-year to $66.7 million last quarter. Veeva is also profitable -- its net income climbed 49% to $7.2 million. Troubling comparisons like these have fueled accusations that Goldman Sachs mispriced Castlight's IPO.

CSLT Chart

Source: Ycharts.

Although Castlight's stock has fared poorly, its customers include a number of well-known  companies, such as CVS Caremark and Tesla. Those customers have helped its backlog reach nearly $109 million, which Castlight expects to fulfill within the next three years. That means that sales will rise, but so most likely will expenses.

What does Teladoc bring to the table?
Teladoc offers connections to board-certified, state-licensed physicians who can treat non-emergency medical issues over the phone, video chat, or mobile app. At $40, a Teladoc consultation is estimated to save an average of $90 compared to an urgent care center visit and a whopping $1,400 when measured against an ER visit.

Integrating Teladoc into Castlight's cloud-based suite can complement both businesses. When individuals conduct a search for a non-emergency medical service on Castlight, they will receive an alert prompting them to opt for a telehealth consultation. Clicking on the alert connects users to the Teladoc service. This drives more users to Teladoc's telehealth platform, and enhances Castlight's business with an additional way for employers and employees to cut health care costs.

Over three years ago, leading insurer Aetna signed a deal with Teladoc to offer telehealth consultations to its members. The reason was simple -- Aetna could cut costs by helping patients reduce costly ER visits for non-emergency situations.

Castlight's two biggest challenges
The Teladoc partnership makes Castlight's platform look more attractive, but it fails to address the company's two biggest challenges.

First, private competitors like Change Healthcare and Healthsparq are offering similar transparency tools to companies. Change Healthcare is backed by major investors like Blue Cross Blue Shield. Healthsparq recently claimed that it reaches 60 million people.

Meanwhile, Aetna and UnitedHealth Group offer similar price transparency tools to major customers for free. Aetna's online tools provide rates for approximately 190 specialties, including optometrists, chiropractors, occupational therapists, podiatrists, and more. UnitedHealth offers a similar tool called myHealthcare Cost Estimator (myHCE). When we consider that Aetna and UnitedHealth also provide telehealth consultations, Castlight's competitive barriers start to melt away.

The Foolish takeaway
In conclusion, Castlight's new partnership with Teladoc is promising, but investors should take a closer look at the company's valuation and competitive challenges. Castlight presents some fascinating ideas about health care cost transparency, but it's a shaky business that could be quickly brought down by private competitors, large insurers, and the company's own sky-high valuation.