Predicting Teladoc Health's Position in the Next 3 Years
Predicting Teladoc Health's Position in the Next 3 Years
Just like any corporation, Teladoc Health (TDOC) is expected to undergo significant transformation over the next three years. The period of peak hype for telehealth operators has come to an end, and it's now up to the management to deliver profitable returns to shareholders through strategic execution, rather than relying solely on marketing.
So, what might this transformation look like in practice? Let's dissect two scenarios and predict the company's future.
Will Teladoc alter its course?
There are essentially two directions Teladoc could take by 2027.
In one situation, the company might concentrate on solidifying its market position in telehealth. The goal would be to create a beneficial ecosystem of services that both subscribers and insurers would find hard to resist, preventing them from switching to competitors. To achieve this, Teladoc might introduce a few new services to maintain growth in its subscriber base and revenue. However, the primary focus would be on harnessing its scale potential in telehealth to build a competitive edge. This would involve retaining its substantial recurring revenue from monthly member payments and upselling them additional offerings for extra fees.
Moreover, Teladoc might realize growth through its efforts to develop virtual primary healthcare and chronic care management services. Integrating patient medical records and data from home medical sensors could become key competitive differentiators. Profitability, at least initially, might not be a major concern.
In the alternative scenario, instead of venturing further into primary care, behavioral health, and other specialties, Teladoc could focus on leveraging its strong position at the top of the customer funnel. It would aim to excel at helping patients decide whether they urgently need to visit an in-person doctor or specialist. Additionally, Teladoc would strive to facilitate prescriptions and arrange follow-ups with primary care for common issues.
Financially, the emphasis would be on reducing the cost of delivering care and boosting margins by eliminating non-essential activities. This approach could result in operational profitability sooner than in the first scenario.
In June, Teladoc appointed a new CEO, Chuck Divita, who also joined its board of directors. Although Divita hasn't yet indicated which scenario Teladoc will pursue, the first scenario was the guiding force behind the previous CEO's strategy.
However, the second scenario might prove more favorable for shareholders. Teladoc's quarterly gross margin is 67.2%, a slight decrease from the same quarter a year ago. Although its membership base expanded to 93.9 million people in the same period, its quarterly revenue declined by 3%, reaching $640.5 million.
In essence, the strategy of introducing additional telehealth services for members hasn't led to consistent top-line growth or improved margins. While there might be future efficiencies due to the scale of its operations, they haven't materialized yet, and there's no evidence to suggest they will soon.
A chart representing Teladoc's total quarterly operating expenses and cost of goods sold (COGS) expressed as a percentage of revenue sheds light on the need for change.
The new leadership has a strong incentive to explore a different approach. If this new approach successfully reduces costs and delivers the second scenario, Teladoc might become profitable within three years (or sooner).
Risks that investors should be mindful of
Despite these likely scenarios, investors should be aware of certain inherent risks associated with each potential future for Teladoc that may not be significant enough to sink the company altogether.
The most significant risk is that major ongoing costs, such as physician labor, can't be significantly reduced. Physicians may not be willing to work for less than their market rate, which can be expensive. Furthermore, equipping them with additional technology likely won't alter this reality.
Another significant risk is that Teladoc may struggle to create a moat to protect its market share from competitors. From a member's perspective, telehealth services are merely a means to the end of speaking with a clinician. If members can't clearly see the added value they are receiving by choosing Teladoc over a lower-priced competitor, they may have little motivation to stay loyal.
In the context of Teladoc's potential transformation, the company might consider optimizing its finance strategy by carefully managing its investments in new telehealth services. This could involve seeking out cost-effective solutions for developing digital tools and services, as well as identifying profitable partnerships that could provide additional revenue streams.
Furthermore, in pursuit of operational profitability, Teladoc could explore opportunities to streamline its operations and reduce expenses. This could involve reevaluating its costs associated with physician labor, such as exploring alternative compensation models or leveraging technology to increase efficiency.