Teladoc's Recovery Story Is Starting to Take Shape. Should You Buy the Stock?

Written by Prosper Junior Bakiny for The Motley Fool->

Teladoc's business is slowly improving due to several initiatives.

However, the company still faces potential headwinds that could derail its progress.

After years of lagging broader equities, Teladoc Health (NYSE: TDOC) is finally bouncing back. The company's shares are up by 28% to date, while the S&P 500 has climbed just 9%. The telemedicine specialist still has plenty of work to do, but could it finally be on the road to full recovery? Let's see whether Teladoc can maintain the momentum it has had this year.

At first glance, Teladoc doesn't seem to be doing that much better. In the first quarter, the company's revenue declined 2% year over year to $613.8 million. Sales from its BetterHelp virtual therapy division fell 9% year over year to $218.4 million, while the number of paying users on BetterHelp also fell 9%. Further, Teladoc remains unprofitable. It posted a net loss per share of $0.36, which, in fairness, was much better than the $0.53 loss per share it recorded in the year-ago period.

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Still, overall, Teladoc's financial results look mediocre. Why is the stock performing well? Part of the answer is that the market is paying attention to several developments that could help fix some of the company's issues. Consider BetterHelp, which was once Teladoc's biggest growth driver. For years, the company tried to get health insurance coverage for this unit. It has finally done so in many U.S. states thanks to an acquisition. Teladoc is seeing clear evidence that this is helping.

As the company reported, virtual therapy users who benefit from insurance coverage averaged about 20% more sessions than cash-paying patients in their first 90 days. Teladoc also expects to end 2026 with an annual run rate of at least $125 million for the company's BetterHelp insurance-covered sessions -- a meaningful improvement over the $75 million it had as of the end of the first quarter. Teladoc is also making progress elsewhere.

Notably, the company's international expansion is still going well. In the first quarter, Teladoc's international revenue grew by 17% year over year to $122.3 million. Meanwhile, Teladoc is implementing various artificial intelligence (AI)-powered initiatives across its business that could have a meaningful impact over the long run. For instance, the company has reduced the administrative work that BetterHelp's therapists do through AI-assisted documentation, allowing them to spend more time focusing on patients.

This is good for everyone involved. Teladoc could continue to see much-improved financial results and stock price performance if it can keep launching initiatives like these.

Although Teladoc has addressed some of the issues it has encountered in recent years, it isn't out of the woods just yet. Here are several things that could go wrong for the telemedicine company. First, although it is making some progress with BetterHelp, thanks to third-party coverage, the virtual therapy space is very competitive. That's one reason why Teladoc faced -- in the company's own words -- "mounting pressure" within its direct-to-patient cash-paying virtual therapy business.

Insurance coverage is helpful, but even with that, BetterHelp's upside might be limited by the increasingly competitive nature of this industry. Second, although Teladoc's international revenue has been growing faster than the rest of the business, the company's global ambitions may eventually backfire. Managing legal and regulatory requirements, insurance rules and regulations, prescriptions, and many other matters that Teladoc engages in across different countries could turn into a nightmare.

We might see Teladoc's expenses rise significantly as the company continues its expansion plans abroad. As a result, it may be difficult for the company to turn profitable. Lastly, although Teladoc's AI-related work looks promising, it is unlikely to give it a significant advantage over most of its competitors, many of whom are also likely implementing similar strategies. The bottom line is that Teladoc has yet to demonstrate it can perform consistently, while it still faces significant headwinds. So, even with the progress it has made, its shares look fairly risky. Investors should keep that in mind before initiating a position. And only those comfortable with volatility should consider doing so.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Teladoc Health. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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