Livongo-Teladoc fusion: resist the noise and imagine the future (NASDAQ: LVGO)


What could have been a big day for Livongo (LVGO) shareholders with the company that announced another record quarter turned into a disastrous day with the acceptance of a seemingly less than attractive merger with Teladoc ( TDOC).

Although both stocks have had an impressive run this year with the companies leading in their respective market segments, I am not happy with this deal as a shareholder of Livongo as I would have preferred to see the company just continue its great growth story and let the magic of the songwriting do the trick over the next few years.

Data by YCharts

Livongo’s share price has skyrocketed this year and it has already become a multibagger in its mission to revolutionize the healthcare market by leveraging data to help people live better with chronic diseases. With a huge potential market, Livongo was prepared for several years of dominant growth. With the company now merging with the slower growing Teladoc, investors have to accept lower growth rates in the future. However, this is not a bad thing! Let’s review the deal and what it means for Livongo shareholders.

What is happening in Livongo?

Livongo’s big 12% drop on Wednesday had nothing to do with his second-quarter impression. The company reported an easy double beat and also significantly exceeded its previous forecast.

Livongo health

(Source: Livongo Investor Relations)

Revenue climbed 125% year-on-year to $ 92 million, with EPS hitting $ 0.11. Revenue growth accelerated sequentially from the already staggering 115% year-on-year clip in the first quarter as the company added another $ 25 million in revenue sequentially. Livongo’s membership has grown to over 410,000 members, up 113% year-on-year, with the company adding around 80,000 members just in the second quarter. Its customers grew to 1,328 from 1,252 at the end of the first quarter of 2020.

(Source: Livongo Q2 / 2020 investor presentation)

Livongo is one of the biggest winners from the COVID-19 crisis, with people with chronic diseases increasingly relying on remote monitoring and self-service, where the AI-based platform of the company creates value for its members and saves expenses for its customers. and the entire health system. It was a win-win-win for everyone involved, which had been pushing the stock price to new all-time highs almost daily, increasing the company’s P / S ratio to a whopping 42x.

Not only is this a massive increase from the already expensive sales valuation of 29 times Livongo when I started my coverage on the company about a month ago, it also makes Livongo the one of the most expensive stocks on the market.

When I started my coverage on the company, I argued that this assessment:

is certainly not cheap, but given the expected growth path, it’s worth paying that price for future growth.

Now that Livongo has announced a merger with Teladoc, this proposal remains intact but weakens given the terms of the deal and the fact that Teladoc has grown slower than Livongo.

Teladoc-Livongo: a merger that investors did not ask for but should still accept

Prior to the deal, Livongo’s growth trajectory was oriented north, and even current investors who missed the big price spike in the $ 100 area could reasonably have expected their investment to fall. transformed into a multibag during this decade.

Livongo’s Total Addressable Market (TAM) for people with diabetes and hypertension represents a total opportunity of $ 46.7 billion, and with the current base of 410,000 in society, it had only captured about 1.5% of this market. The company is clearly still in the early stages, and while the current share price had already factored in many years of growth, the opportunity was still huge despite a high valuation.

I have always viewed Livongo as a buy and hold investment as long as a member of the trillion dollar club, Google (GOOG), Amazon (AMZN), Microsoft (MSFT) or Apple (AAPL), would make a move. and acquire the company at an attractive premium with a much higher valuation compared to the approximately $ 13 billion market capitalization it charges today.

Today’s announcement of the Livongo-Teladoc merger, however, puts an end to 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 the fourth quarter of 2020. After the merger, this means that the Existing Livongo shareholders will own 42% of Teladoc Health.

With Teladoc falling hard on the announcement and losing nearly 1/5 of its market cap, that implies a Livongo share price of around $ 120, which is roughly $ 30 below the all-time high of Livongo established earlier in the week before incorporating the $ 11.33 cash component. .

This implies that investors are not happy with the deal, and it will likely cause the Livongo share price to behave in sync with the movement of the Teladoc share price until the merger is actually carried out.

Warning: This conclusion is based on my understanding that the purchase price is dynamic rather than static. It is not clear to me from the various press releases whether the factor for the equity component is based on Teladoc’s closing price on August 4, 2020 of around $ 250 or on the price when the merger is actually executed. In case it is static, Livongo shareholders can expect a decent premium of $ 158.98 per share in stock and cash over the closing share price of $ 127.97 on August 5, 2020. .

I was initially disappointed with this announcement as I was very confident that Livongo can continue to deliver on its mission and generate staggering returns over the next decade. Examining the strategic rationale for the deal actually excites me, as it could create a real heavyweight in this emerging and rapidly growing digital, virtual, remote and self-service healthcare market.

The combined Teladoc Health company will have pro forma revenue of approximately $ 1.3 billion in 2020, with Teladoc being the market leader in virtual care and Livongo being the main provider of virtual care, both of which are complementary. This has the potential to create what management describes as:

a one-of-a-kind healthcare package that will fundamentally change the way people access and experience healthcare

(Source: TDOC-LVGO presentation)

For the consumer, it will be a revolution rather than an evolution, as it redefines and transforms the delivery, access and experience of health care.

(Source: TDOC-LVGO presentation)

Virtual health services have already been a growing area in recent years, but the current pandemic situation has catapulted growth rates into the stratosphere. While it’s unclear how long the pandemic will last and whether there will ever be an effective vaccine, I have no doubts that digital and virtual healthcare will continue to grow as the value created remains.

What I like most about this deal is that Livongo and Teladoc complement each other almost perfectly. From Teladoc’s perspective, Livongo will help accelerate and amplify various key Teladoc growth strategies by expanding footprint and distribution, innovating clinical services, accelerating consumer adoption and expanding the role in health care delivery.

(Source: TDOC-LVGO presentation)

In an interview with CNBC, the two CEOs also pointed out this, but also acknowledged that the two companies were heading towards competition but instead opted for cooperation and combination, as it creates a one-stop-shop for consumers, which is as simple as it gets. .

The new company also expects significant revenue synergies of at least $ 500 million in 2025, resulting from cross-selling, a new international opportunity for Livongo, and optimized business models.

Takeaway for investors

At first glance, this may seem like a bad deal for Livongo shareholders given that they only receive a small bonus. However, this completely ignores the fact that Livongo’s share price had already more than quintupled in 2020 and, most importantly, the idea of ​​what this new company might someday become.

The digitization of healthcare is, in my opinion, one of the biggest stories of secular growth in at least this decade and combining two largely complementary pioneers in the fields of virtual care, digital health and healthcare delivery. health.

Those who believe that telehealth and digital health mark a paradigm shift in medicine and healthcare will be rewarded with a company that can become a giant and a market leader in this fast growing market segment. Short-term erratic price reactions to these merger announcements are not uncommon but should not distract investors from the visionary future that is being created.

I imagine that sooner or later investors want to have the TDOC / LVGO handset in their technology portfolio, in their growth portfolio, and in their healthcare portfolio. I want to participate and have added to my LVGO holdings today.

One last word

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Disclosure: I am / we have been LVGO, AAPL, MSFT, AMZN for a long time. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose action is mentioned in this article.

Additional Disclosure: I don’t offer financial advice, only my personal opinion. Investors may consider other aspects and their own due diligence before making a decision.


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