Teladoc stock has been under pressure since management signaled it expects little growth in membership this year.
Courtesy of Teladoc
Teladoc shares tumbled yet another 3% on Tuesday, pushing the stock’s loss to 8% week to date.
Teladoc Health (ticker: TDOC) has been on a roller-coaster ride over the past year. The virtual healthcare provider has seen a surge in its U.S. paid membership––up by 41% from a year ago to reach 52 million by the end of 2020––as the pandemic locked most Americans at home. Expectations for a bright future had boosted the stock by 250% from the beginning of 2020 to its peak in mid-February.
The stock has been under pressure for the past few months, however, since the firm signaled that it expects little membership growth in 2021. A lack of growth is bad for any company, but is particularly tough for those like Teladoc that are losing money, whose share prices are pegged to their growth potential.
Last Wednesday, the company reported a first-quarter net loss of $1.31 a share, much worse than the 54 cents Wall Street expected. That news triggered more declines in the stock; it is now down 46% from its February peak.
But the latest selloff isn’t just the aftermath of the poor earnings. This week, concern mounted over whether Teladoc can retain its customers in an increasingly competitive space.
In a Wall Street Journal article published on Monday, PepsiCo ‘s former head of benefits Erik Sossa said that the firm stopped using Teladoc and switched to rival LiveHealth Online, partially because the digital-health service isn’t connected to PepsiCo’s existing health plan, making it impossible for doctors to see patients’ health histories. “Telemedicine is a fantastic medium, but if it’s just late-night urgent care, it’s kind of a commodity,” Sossa told the Journal.
Such commentary isn’t new. Bruce Broussard, CEO of the health-insurance giant Humana (HUM), also called telehealth a commodity when discussing the firm’s recent acquisition of Kindred at Home last week, Cantor Fitzgerald analyst Steven Halper said in a Monday note. Although many offline physicians have embraced telehealth, it is hard for vendors like Teladoc to distinguish their technology and services, Halpert told Barron’s in an email.
“We have long held the view that telehealth will become increasingly commodity-like, as payers and providers seek technology solutions and compete against the Teladoc services model,” wrote Halper. This means high price-sensitivity among clients, high churn rate, and a large number of smaller vendors. At the same time, he noted, if more doctors start to offer their own telehealth services, they could win market share from existing players in the business.
But not everyone is bearish. The loss of the PepsiCo contract is old news that should already be priced in, wrote Credit Suisse analyst Jailendra Singh in a Monday note. Teladoc management told Singh that PepsiCo membership has been cut “for a long time,” wrote the analyst, so the firm’s membership number by the end of 2020 likely already excluded those contracts.
Singh argued that the loss of the contract isn’t significant for Teladoc as PepsiCo’s 120,000 U.S. employees represent a small fraction of Teladoc’s 52 million U.S. paid membership. Contract losses appear to be unusual: Teladoc management told Singh that it has a consistent retention rate of more than 90%.
Still, investors are concerned that contract losses could become a more frequent problem. A recent Credit Suisse survey shows that 81% of the responding companies are offering telehealth benefits to their employees via health insurers instead of direct contracts. A decision to do the same is likely behind PepsiCo’s shift away from Teladoc, according to Halper. One of the firm’s health insurers, Anthem (ANTM), was the previous owner of LiveHealth Online.
Despite the contract loss, Singh thinks Teladoc is well-positioned. While the firm already has a dominant market share when it comes to direct contracts with employers, it has also signed contracts with several health insurers in recent years. On the earnings call last week, for example, management highlighted the firm’s expanded relationship with a regional Blue Cross Blue Shield plan on the East Coast. Singh estimated that more than 70% of Teladoc’s U.S. paid subscription members are currently contracted through health insurers.
Both analysts believe the stock has room to rise following its recent selloff. Halper has a Neutral rating on the shares with a price target of $210, about 33% higher than the stock’s Tuesday close at $158.37. Singh has an Outperform rating, with a target of $264. At its peak in mid-February, the stock closed above $294.
ARK Invest CEO Cathie Wood, for one, remains a bull on the stock. The asset- management firm bought nearly one million additional Teladoc shares last week after the stock slumped in response to the first-quarter results. Teladoc is now the largest holding in the ARK Genomic Revolution ETF (ARKG), with a 7% weighting, as well as the second-largest holding of the ARK Innovation ETF (ARKK), at 6.1%, just below Tesla (TSLA).
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