Shares of Teladoc Health (TDOC 0.30%) shot up last week after the company reported better-than-expected third-quarter results. The company has yet to post significant profits, but its third-quarter losses were far less than investors had come to expect from the telehealth provider.
Shares of Teladoc Health rose a surprising 24% last week, and investors want to know if they can expect more gains from here. To see if this company has what it takes to deliver big profits for its shareholders, let’s take a look at why it has soared recently.
Why Teladoc Health Shares Soared Recently
Shares of Teladoc Health recently had one of their best days in a long time, as the company posted a much smaller third-quarter loss than investors are used to. Writing off the Livongo acquisition in 2020 resulted in a reported loss of $9.8 billion in the first half of 2022.
Instead of another huge loss in the third quarter, the company lost just $73.5 million. While investors would have preferred a profit, the modest loss of $0.45 per share was significantly less than the $0.55 per share that Wall Street had forecast.
Reasons to buy Teladoc Health now
In addition to the bottom line moving into positive territory, there are other signs that Teladoc Health can deliver gains for patient investors. In the third quarter, total revenue increased 19% year over year as the number of paid members reached 57.8 million.
In theory, the value of Teladoc Health’s platform grows as more patients and doctors become familiar with it. The company wins the race to develop the network effect. It facilitated over 4.7 million visits in the third quarter, a 14% increase over the year-ago period.
Reasons to remain cautious
Any technology-based company with over 50 million paid members that still can’t make ends meet should be viewed with some suspicion. I’m not a buyer of this stock because I don’t think Teladoc’s business has any pricing power.
If Teladoc Health’s overall size helped it charge higher prices than its smaller rivals, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) would have risen as a percentage of revenue. Instead, adjusted EBITDA fell to 8.4% of total revenue in the third quarter from 13.9% at the end of 2021.
Also, Teladoc Health likely won’t be the largest telehealth provider for a very long time if it isn’t already pushed out of that position. Venture-backed Doctor On Demand isn’t a publicly traded company subject to the same disclosures as Teladoc, but we do know it boasts 98 million lives covered right now.
Teladoc’s biggest competitors in the coming years will most likely be health care managers moving deeper into primary care. Health benefits insurance is an increasingly lucrative option for a small handful of giant companies that also collect health insurance premiums. Instead of hiring Teladoc to facilitate virtual doctor visits, Cygna acquired MDLive last year.
Earlier this year, CVS Health splashed out with an $8 billion takeover bid It means health. It’s a network of 10,000 clinicians who will reach 2.5 million unique members this year through a combination of in-person and virtual visits.
It doesn’t look good
Facilitating virtual healthcare is such a commoditized service that even pandemic-fueled lockdowns haven’t been able to pull Teladoc Health’s bottom line out of the red. Now that giant health benefits managers are heavily focused on primary care benefits, turning a profit in this competitive space will only become more challenging. With no clear path to profitability, it’s probably best to watch Teladoc Health from a safe distance.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Teladoc Health. The Motley Fool recommends CVS Health and CVS Health Corporation. The Motley Fool has a disclosure policy.