What could have been a great day for Livongo’s shareholders (LVGO), with the company reporting another record quarter, turned into a terrible day, agreeing to a seemingly less attractive merger with Teladoc (TDOC).
Although both stocks had an impressive performance this year, with the companies being leaders in their respective market segments, I am not happy with this deal as a shareholder of Livongo, given that I would prefer to see the company just continue its big growth story and let the magic of compiling do the trick for years to come.
Livongo’s stock price has jumped this year, and it has already become a multi-excavator on its mission to revolutionize the healthcare market by using data to help people live better with chronic conditions. With a massive potential market, Livongo was prepared for several years of dominant growth. As the company merges with the slow-growing Teladoc, investors need to accept lower growth rates ahead. However, this is not bad! Let’s take a look at the deal and what it means for Livongo shareholders.
What’s going on with Livongo?
Livongo’s big drop of 12% on Wednesday has nothing to do with Q2’s footprint. The company reported an easy double hit and also conveniently exceeded its previous guidelines.
(Source: Livongo Investor Relations)
Revenue rose 125% Y / Y to $ 92 million, with EPS reaching $ 0.11. Top-line growth accelerated consistently from the already staggering 115% Y / Y clip in the first quarter, as the company added another $ 25 million in revenue. Livongo’s membership grew to over 410,000 from 113% on an annual basis, with the company adding about 80,000 members in Q2. His customers jumped 1328 from 1,252 by the end of Q1 / 2020.
(Source: Livongo Q2 / 2020 Investor Presentation)
Livongo is one of the biggest winners in the COVID-19 crisis, with people with chronic conditions increasingly relying on remote monitoring and self-service, where the company’s AI-driven platform creates value for its members and saves costs for its customers. and the entire health system. This is a winning profit for all participants, who pushed the share price to new highs for all time almost every day, increasing the company’s P / S ratio to a huge 42 times.
This is not only a big increase from the already expensive 29-fold sales estimate that Livongo valued when I started covering the company about a month ago, but it also makes Livongo one of the most expensive stocks on the market ever.
When I started covering the company, I claimed that this assessment:
it is certainly not cheap, but given the expected growth trajectory, it is worth paying this price for future growth.
Now that Livongo has announced a merger with Teladoc, that offer remains intact, but weakens given the terms of the deal and the fact that Teladoc is growing slower than Livongo.
Teladok-Livongo: Investors in mergers did not ask, but still need to embrace
Prior to the deal, Livongo’s growth trajectory was in the north, and even current investors who missed the big $ 100 price rise could reasonably expect their investment to become a multi-dredger throughout the decade.
Livongo’s total addressable market (TAM) for people with diabetes and hypertension totaled $ 46.7 billion, and with the company’s current membership base of about 410,000, it had conquered only about 1.5 percent of that market. The company is clearly still in early earnings, and although the current share price has already been valued in many years of growth, the opportunity was still huge, despite the high rating.
I have always seen Livongo as an investment to buy and hold, as long as a member of the trillion club, Google (GOOG), Amazon (AMZN), Microsoft (MSFT) or Apple (AAPL), to make a move and acquire a company with an attractive premium at many a higher estimate than the approximately $ 13 billion market cap it commands today.
However, today’s announcement of the Livongo-Teladok merger completes this investment idea. Instead, Livongo shareholders will receive 0.592 shares of Teladoc Health plus a cash component of $ 11.33 per share, calculated at the time the transaction is expected to close in Q4 / 2020. Following the merger, this means that existing Livongo shareholders will own 42% of the combined company Teladoc Health.
As Teladoc dropped sharply in the announcement and rejected almost 1/5 of its market maximum, this suggests a share price of Livongo of about $ 120, which is well by $ 30 lower than the highest level of Livongo, placed more early in the week before including the $ 11.33 cash component,
This means that investors are not happy with the deal and this is likely to adjust Livongo’s share price to keep pace with any developments, Teladoc’s share price will be shown until the merger is actually completed.
Disclaimer: This conclusion is based on my understanding that the purchase price is dynamic, not static. It is not clear to me from the various press releases whether the stock component ratio is based on the closing price of Teladoc on August 4.2020 of about $ 250 or on the price when the merger actually took place. If it is static, then Livongo shareholders can expect a decent premium of $ 158.98 per share and cash compared to the closing price of the share of $ 127.97 on August 5, 2020.
At first, I was disappointed with this announcement, as I was very confident that Livongo could continue to fulfill its mission and achieve a staggering return over the next decade on its own. However, reviewing the strategic rationale for the deal actually excites me, as it could create a real jungleout in this fast-growing market for digital, virtual, remote and healthcare services.
The combined company Teladoc Health will have about $ 1.3 billion in proforma revenue by 2020, with Teladoc being the market leader in virtual care and Livongo the leading provider of virtual care, complementing each other. This has the potential to create what management describes as:
a first-of-its-kind full-service care service that will radically change the way people have access to health care
(Source: TDOC-LVGO presentation)
For consumers, this will be a revolution, not an evolution, as it redefines and transforms the delivery, access and experience of healthcare.
(Source: TDOC-LVGO presentation)
Virtual health services have been a growing area in recent years, but the current pandemic situation is catapulting growth rates in the stratosphere. Although it is not clear how long the pandemic will last and whether there will ever be an effective vaccine, I fully believe that digital and virtual healthcare will continue to grow only as long as the value that is created remains.
What I actually like most about the deal is that Livongo and Teladok complement each other almost perfectly. From Teladoc’s perspective, Livongo will help accelerate and expand Teladoc’s various key growth strategies by expanding its footprint and distribution, innovating clinical services, accelerating customer acceptance and expanding its role in healthcare delivery.
(Source: TDOC-LVGO presentation)
In an interview with CNBC, the two CEOs also highlighted this, but also acknowledged that the two companies have focused on competition, but rather opted for collaboration and combination, as this creates a single counter for consumers that is as simple as it’s working. ,,
The new company also expects significant synergies for revenue of at least $ 500 million in 2025 as a result of cross-selling, international greenfield opportunity for Livongo and optimized business models.
Bringing out an investor
At first glance, this may seem like a bad deal for Livongo’s shareholders, given that they receive only a small premium. However, this completely ignores the fact that Livongo’s share price has already doubled in 2020, and especially the idea of what this new company could one day become.
The digitalisation of healthcare is, in my view, one of the greatest stories of global growth, at least during this decade, and by combining two largely complementary pioneers in virtual care, digital health and healthcare delivery.
Those who believe that calf health and digital health mark a paradigm shift in medicine and healthcare will be rewarded with a company that can become a powerout and a market leader in this fast-growing market segment. The short-term irregular price reactions to these merger announcements are not uncommon, but they should not distract investors from the visionary future created.
I imagine that sooner rather than later, investors want to have the combined TDOC / LVGO in their technical portfolio, in their growth portfolio and in their healthcare portfolio. I want to participate in this and today I added to my shares of LVGO.
One last word
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Disclosure of information I am / have long been LVGO, AAPL, MSFT, AMZN. I wrote this article myself and it expresses my own opinions. I do not receive compensation for this (other than the search for alpha). I have no business relationship with any of the companies whose shares are mentioned in this article.
Additional disclosure: I do not offer financial advice, only my personal opinion. Investors can consider additional aspects and their own care before making a decision.