AsiaVision
Introduction
On August 24th, 2022, Amazon (AMZN) announced that it will be shutting down its telehealth business. The news comes after months of Amazon attempting to aggressively grow the business through heavy investments including acquisitions. As such, Teladoc (NYSE:TDOC), the existing leader in the telehealth market, stands to benefit from Amazon’s retreat.
Telehealth quickly and temporarily rose to the go-to healthcare service during the pandemic; however, as restrictions started to lift, the service’s popularity declined. As a result, Teladoc’s growth rate has been slowing leading to downward pressure on its stock. However, Telehealth, along with the digitalization boom, is expected to continue its growth, and I believe Teladoc will be one of the biggest beneficiaries of this secular trend due to its continual execution to reach the company’s vision. Further, with the potential threats from Amazon gone and stock at all-time lows, I believe Teladoc is a buy.
Amazon Out
As mentioned at the beginning of the article, Amazon announced that it will be shutting down its telehealth business starting in 2023 even after Amazon acquired One Medical for $3.9 billion in July 2022. Amazon cited that the company’s telehealth service is not a long-term solution for its enterprise customers because the service Amazon provided was not complete enough.
Some investors may think that Amazon leaving the market is a bad sign for Teladoc since one of the biggest conglomerates does not see a profitable future in the telehealth business. However, for Teladoc, I believe the news creates significant positive catalysts. In my opinion, Amazon left the market because they were not competitive not that the company saw no future in the telehealth market since the reasoning for Amazon’s exit was that the coverage of Amazon’s service was not complete enough.
Telehealth service gives the biggest player a significant upper hand. The company with scale will likely continue performing well. Customers need a wide variety and quality coverages for the telehealth provider to be considered. For example, if a patient requires mental and chronic care from a telehealth service, then the patient will most likely choose a platform that has both services, but Amazon does not provide mental health services as of today. As such, I believe Amazon saw the telehealth service as needing massive capital investments over multiple years to attempt to overcome some competitive moats leading players have today leading to Amazon shutting down its telehealth dream.
Teladoc, on the other hand, is the most known telehealth provider with one of the most extensive coverages including primary care, chronic care, mental care, general appointment, skin care, sexual health care, and more. Thus, I believe Amazon’s decision signifies the advantage and opportunity Teladoc has. Amazon not only showed the advantage existing leaders like Teladoc have in the industry, but Amazon also reduced competitive risks for Teladoc.
Telehealth Market and Teladoc
Telehealth is expected to grow in the coming years, and I believe Teladoc will be one of the biggest beneficiaries. According to Fortune Business Insights, the telehealth market size was about $90.74 billion in 2021, and by 2028, the market is expected to grow to $636.38 billion at an annual growth rate of about 32.1%.
Teladoc is one of the biggest telehealth operators today, and the company’s continual efforts to unify its offering to become the first doorstep to healthcare will likely allow Teladoc to remain competitive and grow with the market. Online healthcare appointments are easier, more flexible, often cheaper, and more accessible. As such, even if patients are needing medical assistance beyond Teladoc’s product offerings, which is becoming less and less likely, Teladoc can quickly refer the patients to the necessary hospital and doctors removing unnecessary doctor visits and wait times. The possibilities of digital healthcare service, therefore, rest in both the digital and physical world. For this reason, Teladoc, as it strives to make this future possible, will likely remain competitive and capitalize on the fast-growing market.
Further, as I have mentioned in my previous article, due to the continuously declining birthrate, our population is getting older and older likely putting stress on the existing in-person healthcare system. Telehealth, with its flexibility and comfort, may be able to partake in solving the problem, especially since the generations that will be needing healthcare the most in the coming few years will likely be more familiar with digitalization than the previous generation.
Therefore, Teladoc’s competitiveness in the growing market along with the favorable long-term underlying trend creates an opportunity for Teladoc in the coming decade.
Teladoc’s Recent Struggles
Teladoc’s stock price has been struggling in recent months. The company wrote off about $9.6 billion in goodwill impairment charges. Simply, the company’s acquisition of Livongo for $18.5 billion in stock at the peak of the bull market bubble turned out to be a problem. As the market cooled and the valuation dropped, Teladoc had to write off its acquisition, which seemed disastrous on the surface. However, in reality, I do not think the write-off warrants Teladoc’s dramatic stock crash. Teladoc purchased Livongo when the company’s stock was trading above $200 per share, which is more than 6 to 7 times today’s price. Thus, even after writing off about half of Livongo’s valuation in a goodwill impairment charge, I believe the deal was not terrible as Teladoc itself was overvalued. The situation is certainly messy, but it is hard to conclude that Teladoc made a bad decision as the company took the opportunity to seek long-term growth by expanding its service.
The telehealth market is expected to grow fast and the goodwill impairment charge, which seems terrible on the surface, is hard to conclude that it was a mistake. Further, relative growth rates comparing pandemic time growth to today’s economic downturn growth will slowly dissipate. Therefore, I believe investors should look beyond Teladoc’s recent struggles and look at the company’s long-term potential.
Summary
Amazon is leaving the telehealth business proving the strong moat existing companies have in the industry, especially the leader, Teladoc. Further, Teladoc’s continual efforts to expand its service to become the first doorstep to healthcare will likely allow the company to keep its leadership in a fast-growing telehealth industry. The world is changing and digitalization is part of it. Therefore, despite the recent goodwill impairment charge drama, after the dramatic fall of the company’s stock, I believe Teladoc is a favorable investment for long-term investors.
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