Imagine if you never again had to sit in a doctor's office waiting room. A company named Teladoc (NYSE: TDOC), the largest provider of telehealth services in the nation, is trying to make that dream a reality. Telehealth is basically Facetime, but instead of a friend or a relative on the other end, it's your doctor. The company is growing rapidly, satisfying customers and strengthening its moat -- and Teladoc might be just the dose of growth your portfolio needs.
Teladoc is disrupting the traditional doctor's visit, with behavioral health, dermatology, and non-urgent medical matters accounting for most of telehealth traffic. No longer do patients have to call in, schedule an appointment, drive to the office, wait, wait some more, and then finally see a doctor. Teladoc's website boasts that a Member (i.e. patients using the platform) can "visit" with a doctor in less than 10 minutes from request to interaction. That's not bad, especially if the waiting room is your very own living room.
The platform has been resonating with patients. Almost 1 million Members completed a telehealth visit in 2016, up from 576,000 just a year before. The number of yearly medical care visits is nearly 1.5 billion, according to Teladoc, so this could just be the beginning of a disruption to in-person medical care.
Teladoc's revenue grew 60%, 78%, and 119% in 2016, 2015, and 2014, respectively. Teladoc has two revenue streams: subscription revenue from Clients and revenue from each visit by a Member. Interestingly, revenue from individual visits only makes up 18% of Teladoc's total revenue versus 82% from subscriptions -- meaning that the Clients are Teladoc's true target customers. Teladoc is able to reach 20.1 million Members with just 7,500 Clients.
Teladoc's selling point to Clients is cost savings. A study found, on average, Clients were saved $472 per Member visit and a total of $493 million in 2016. Traditional doctor's offices need to lease buildings and cannot be quickly scaled. Similar to how retailers are struggling versus e-commerce players, telehealth providers can save costs because they have less overhead and so many suppliers (doctors in this case).
The doctors are central to Teladoc's competitive advantage. The company currently has over 3,000 doctors signed on, and it recently acquired Best Doctors, which has 50,000 M.D.'s in its network. It will be interesting to see how well Teladoc can integrate this new pool of doctors into the platform, and this acquisition has the potential to strengthen the company's advantage immensely.
Teladoc is not the only telehealth company out there, but it's by far the biggest -- and in this business, scale means everything. Once Clients sign on to the platform, the chances of finding a lower price are slim and so retention rates are high. As more Clients sign up, more doctors are needed, and the advantage strengthens further -- a network effect at its finest.
The company's top dog advantage is getting stronger, but there are some risks involved.
- First, Teladoc has acquired its way to the top, mostly by selling shares -- and such dilution waters down returns for existing investors. Teladoc already corners 75% of the market and has three times the market share of its next three competitors combined. New acquisitions would likely add little to the company's might, and they could be downright dangerous if they require even more dilution.
- As mentioned, Teladoc is not yet profitable, even on an operating cash flow basis. If Teladoc starts losing Clients to competition or sub-par service, having negative cash flow will only exacerbate any mishaps.
- Lastly, the company's rapid growth has led to a premium valuation. Teladoc trades for over 13 times the trailing twelve months' revenue, a hefty price to pay.
Though telehealth is a promising industry and Teladoc is growing rapidly, the stock is not fool-proof. This company is a highflier and not for the faint of heart. I wouldn't want you to have to use Teladoc's platform to treat your anxiety because of the stock's volatility! Seeing the big picture here is important though. If Teladoc can continue to sign on Clients, the future looks mighty healthy.
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