This Stock Could Benefit From the Coronavirus Outbreak

I try not to let short-term factors affect my long-term investing decisions. The COVID-19 outbreak is one such short-term factor. It is most definitely going to impact economic growth and corporate earnings this year for many countries. But it will likely have no economic impact five years from now.

So despite the huge drop in the S&P 500 and Dow Jones Industrial Average in the US stock market last week, I am still resolutely holding on to all my stocks. I believe that the economic impact will be short-lived and companies with strong balance sheets, recurring income, and steady free cash flow will be able to weather this storm.

At the same time, I am not hopping on the bandwagon of overly-hyped companies that could benefit from the coronavirus situation over the short-term, such as mask and glove producers. These manufacturers may see a sharp spike in revenue over the next few quarters, but the jump in sales will likely only be a one-off event.

All that being said, I think this latest global virus outbreak could still potentially throw up some unique long-term opportunities. One company I see benefiting long term from the outbreak is Teladoc Health Inc (NYSE: TDOC).

Why COVID-19 could benefit Teladoc

Teladoc is the leading telemedicine company in the US. It provides video consultations for primary care, dermatology, and behavioural health. The company’s app makes getting professional healthcare advice so much easier. Patients simply need to open the app and start a video consulting session with a doctor. Best of all, this can be done in the comfort of your own home, which is all the more important when you are suffering from an illness and don’t want the hassle of travelling to your local clinic.

The COVID-19 outbreak in the US could be the catalyst that Teladoc needs for faster adoption of its technology. Video consultations will reduce the spread of infections, enable patients to get real-time advice, and increase the consultation-efficiency for doctors. All of these advantages are important at a time when the virus is rampant and patients need access to quick and effective advice.

CEO Jason Gorevic also said in the company’s latest earnings conference call, “We also see that once members use our services for the first time, they are much more likely to use us again.” As such, if COVID-19 does increase adoption of Teladoc during this time, the likely impact will be that patients who use the technology for the first time will continue using it in the future.

Strong growth even before the outbreak

Although the COVID-19 epidemic will likely increase the rate of adoption of video consultations around the world, Teladoc has already seen rapid growth even without this catalyst.

Teladoc reported a 32% increase in revenue in 2019. The total number of visits increased by 57% to 4.1 million, exceeding the company’s own projections.

And the leading telehealth company is expecting more growth in 2020. Even before factoring the spread of COVID-19 in the US, Teladoc reported in its latest earnings update that 2020 revenue will increase by 25% at the low-end. Over the longer term, Teladoc expects to grow between 20% to 30% a year.

Huge addressable market

Back in 2015, Teladoc said in its IPO prospectus that the Centers for Disease Control and Prevention in the US estimated that there were 1.25 billion ambulatory care visits in the United States per year. Of which, 417 million could be treated by telehealth. And that figure should be much larger today. 

Teladoc, therefore, has plenty of room to grow into. In 2019, despite the 57% spike in the number of visits, total visits were still only 4.1 million. That is less than 1% of its addressable market in the US alone.

The international market provides another avenue of growth. Online consultations could be an even greater value-add in countries with lower doctor-to-patient ratios and where access to doctors is even more prohibitive. Right now, international markets only contribute less than 20% of Teladoc’s revenue. 

Recurring revenue model

Another thing I like about Teladoc is its revenue model. The telemedicine company has recurring subscription revenue that it derives from employers, health plans, health systems, and other entities. These clients purchase access to Teladoc services for their members or employees. 

The revenue from these clients is on a contractually recurring, per-member-per-month, subscription access fee basis, hence providing Teladoc with visible recurring revenue streams.

Importantly, the subscription revenue is not based on the number of visits and hence should have a huge gross profit margin for the company.

Teladoc ended 2019 with 36.7 million US paid members, a 61% increase from 2018. In 2019, this subscription access revenue increased 32% from a year ago and represented 84% of Teladoc’s total revenue.

Other significant catalysts

Besides the COVID-19 outbreak, there are possible catalysts that could drive greater adoption of Teladoc services in the near future.

• Mental health services driving B2B adoption: As mental health continues to become an increasingly important health issue, Teladoc’s mental health product has been a significant contributor to its B2B adoption.
• Expanding its product offering: Teladoc launched Teladoc Nutrition in the fourth quarter of 2019, offering personalised nutrition counselling. Nutrition is becoming an increasingly important aspect of preventive medicine and the new service could add significant value to existing and new clients.
• Regulatory shifts in the US: In April 2019, the Centers for Medicare & Medicaid Services finalised policies that could potentially benefit Teladoc. Its new policies increase plan choices and benefits and allow Medicare Advantage plans to include additional telehealth benefits. Jason Gorevic, Teladoc’s CEO, commented on this: “We view this as further evidence of CMS encouraging the adoption of virtual care in the Medicare population, and we continue to see a significant avenue for growth within the Medicare program.”
• Acquisition of InTouch Health: Besides organic growth drivers, Teladoc is expected to complete the acquisition of InTouch Health in the near futue. InTouch Health is a leading provider of enterprise telehealth solutions for hospitals and health systems. 

The Good Investors’ Take

The COVID-19 situation is likely going to hinder the growth of many companies in the near term at least. However, Teladoc looks like one that will buck the trend and will instead benefit in both the short and long run from the epidemic.

Besides the COVID-19 catalyst, the long-term tailwinds surrounding the truly disruptive service and Teladoc’s first-mover advantage in this space gives it an enormous opportunity to grow into.

There are, however, risks to note. Competition, execution risk, and the company’s inability to generate consistent free cash flow are all potential risks. Moreover, the telehealth provider’s stock trades at more than 16 times trailing revenue, a large premium to pay. Any hiccups in its growth could cause significant volatility to its share price.

Nevertheless, I think the reasons to believe it can grow in the long-term are compelling. Its addressable market is also big enough for multiple players to split the pie. If Teladoc can even service just 20% of its total addressable market, it will likely be worth many times more by then.

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