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One of the biggest things weighing on Teladoc Health (TDOC 5.65%) is the company’s lack of profitability. Teladoc’s shares plummeted 74% last year after the telemedicine giant moved farther away from the goal. What happened? Teladoc announced two, billion-dollar non-cash goodwill impairment charges. They were linked to an acquisition.
Investors like Teladoc’s investment in growth — but only if they still can see a path to the company actually generating a profit from it. Chief Executive Officer Jason Gorevic may be about to deliver. Gorevic recently announced cost cuts, including a 6% cut in the workforce. Is this truly a big step toward profitability for Teladoc? Let’s find out.
First, a bit of background. Teladoc’s business took off during the earlier stages of the pandemic. People preferred staying home to crowding into medical offices — and in some instances, those offices were closed. As a result, Teladoc’s revenue and visits increased in the triple digits.
But Teladoc isn’t a pandemic stock. The company already was growing in the double digits prior to the health crisis. And every quarter last year, Teladoc reported double-digit growth in revenue and visits.
Teladoc’s clients include more than half of Fortune 500 companies — and the telemedicine leader‘s pledge to treat the “whole person” continues to win new members. By “whole person,” Teladoc means both mental and physical health — and the management of chronic conditions.
Still, Teladoc has failed to turn revenue growth into profitability. The company acquired Livongo, a specialist in the management of chronic illnesses, back in 2020. That was positive because it added to Teladoc’s strengths in a high-growth area. More than half of adult Americans suffer from at least one chronic illness.
But the Livongo purchase came at a time when the stock market — and companies’ valuations — were soaring. Last year, Teladoc posted the goodwill impairment charges mentioned above in the first and second quarters. They totaled $9.6 billion. And this deepened investors’ worries about Teladoc’s chances of reaching profitability.
Things started to look brighter in the third quarter, though. The company’s net loss narrowed. It continued to grow membership and revenue per member. Teladoc management also has hinted that the Livongo purchase should pay off over time. That’s because chronic care is helping Teladoc retain members. The company has found that those who sign up for multiple chronic care programs are more likely to stick around.
Now, let’s get back to Gorevic’s latest move. In the fourth quarter, the company decided to cut staff — a total of about 300 jobs — and reduce office space in some markets. This won’t result in a step toward profitability overnight. In fact, the actions will result in expenses in the near term. Teladoc said in a filing to the Securities and Exchange Commission that it expects $17 million in pre-tax charges this year.
But, over time, the company’s restructuring plan should pay off. “Businesses like ours must transition to the more balanced growth of revenue and profitability,” Gorevic wrote in a note to employees as he announced the job cuts. He added that the company aims to focus on “balanced growth.”
Gorevic said the new plan sets Teladoc on the right path toward profitability. He also mentioned investing resources in innovation.
So, what does this mean for Teladoc? We won’t see the big step toward profitability in the next earnings report — but that doesn’t mean it isn’t there. Teladoc’s working to cut expenses where needed and invest in areas that can drive more growth. These are key moves along the path to generating a profit. And they take time.
Overall, expense reduction is positive news if you’re a Teladoc investor or if you’re thinking of buying the shares. Because this move may be just what the doctor ordered to put Teladoc stock on the road to recovery — and growth over the long term.
Adria Cimino 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.
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