The race to dominate the telehealth space is heating up, so in this rapidly expanding market, which is a better investment: the first mover or the hot IPO?
Oct. 3, 2020
The telehealth industry has seen significant growth with COVID-19 acting as a catalyst in recent times. Stocks like Teladoc (NYSE: TDOC) reached new heights and caused smaller companies such as Amwell (NYSE: AMWL) to go public. The two companies are in the midst of a patent infringement dispute, but which one is the better investment?
Teladoc Bull vs Bear Arguments
Teladoc is undoubtedly the leader in telemedicine and has further cemented its position at the top through its $18.5 billion merger with Livongo (NASDAQ: LVGO). It serves millions of customers across 175 countries with a wide range of services from doctor visits, mental health, and now chronic conditions through the merger.
In Q2, revenue increased 85% year-over-year (YoY) to $241 million and total visits surged by 203% to 2.8 million from the year prior, while the Livongo deal is now expected to help this grow going forward. CEO Jason Gorevic stated that the widespread adoption of telemedicine is here to stay, and even in areas that are not hotspots, there is sustained demand well above pre-COVID levels. However, Teladoc is still operating at a loss, which fell from $29.3 million to $25.7 million YoY in Q2. Management also raised guidance for the current fiscal year.
Teladoc currently has 51.5 million paying members, up 92% YoY and an impressive 90% retention rate. Its clients include over 40% of Fortune 500 employers, along with hospitals and insurers, while more than three-quarters of Teladoc's revenue is subscription-based.
The recent merger with Livongo appears to be an attractive opportunity but carries with it an execution risk considering Livongo's $18.5 billion valuation is huge. However, Teladoc has a history of growth through acquisition and has executed the acquisition of InTouch which has grown rapidly and is one of the key reasons management has raised guidance. The Livongo merger is forecast to create $500 million in synergies by 2025, serving over 70 million customers and should create value for shareholders.
Amwell Bull vs Bear Arguments
Amwell (formerly American Well) went public in September 2020, and enables its customers to provide telehealth solutions through the use of its technology. The company is also backed by Alphabet, which has a $100 million stake in the company.
The company was founded by two brothers Ido and Roy Schoenberg who serve as the chairman and president respectively as well as co-CEO. The founders control 51% of the voting power with inside ownership of approximately 25% each which may be encouraging for investors.
Amwell, in its S-1 filing, reported revenue growth of 77% to $122.3 million YoY for the first six months of 2020 with 84% of this being recurring revenue. Before COVID-19, it was reporting revenue growth for fiscal 2019 up 30.6% YoY. Amwell reported 2.9 million visits for the six months ended June 30th 2020 and increased by roughly 300-400% compared to the first three months of 2020. Despite this surge in revenue, Amwell's net losses tripled YoY to $113.4 million along with a decline in gross margins as it struggled to keep up with demand.
Amwell provides telehealth services to over 2,000 hospitals along with health plans whose clients include 36,000 employers, while also boasting partnerships with the likes of Apple Philips. These partnerships account for less than 10% of revenue, but management plans to expand this. A risk that investors should be aware of is the concentration of customers with its largest customer, Anthem, which accounts for 23% of revenue while the other top 9 account for 21%.
Amwell will most likely need to follow in Teladoc's footsteps by acquiring companies to complement its organic growth.
Which stock is a better buy right now?
The telehealth space is unlikely to be a winner takes all scenario, so there is room for both companies. However, Teladoc appears to be dominating currently and is the first mover in the space. It also has significantly more revenue and customers along with better margins and is not losing as much money as Amwell. Therefore, Teladoc appears to be the better buy right now.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
