Livongo (LVGO) and Teladoc (TDOC) – What To Do Now?
Everybody who owns these stocks is wondering what they should do now, so let’s get into it from the perspective of Livongo shareholders since that’s what we own. That said, given that what’s good for LVGO is also good for Teladoc holders, the actions are probably the same.
As you know if you’ve read anything about this deal, these two companies are the “it” players in digital health. Both have business-to-business-to-consumer (B2B2C) business models, meaning they sell to companies, but solutions are used by consumers like you and me.
Livongo specializes in monitoring of chronic conditions, namely diabetes, hypertension and behavioral health, while Teladoc is more about providing a range of on-demand health services via phone, mobile, internet, etc.
Customer overlap is only around 25% so these are very complementary businesses on that front and the holy grail of “upselling” both customer bases is very real.
Word on the street is that customers of both have been asking for a merger of equals so from a consumer (us) and purchaser (employers) perspective this seems like a good fit. That point should not be lost on investors – if the people who are making the decision to pay for these services want the companies together because it provides a better user experience then is the merger a good thing, or not?
There doesn’t seem to be much risk of this deal getting done from an antitrust or other purchaser perspective, though you never know until the ink is dry.
Once merged, Livongo shareholders will own roughly 42% of the combined firm with Teladoc shareholders owning the remaining 58%. Mechanically, every LVGO share you own should convert into 0.5920 shares of TDOC, plus $11.33 per share should be deposited into your account. TDOC will be the company you’ll own moving forward. Teladoc CEO Jason Gorevic will lead the charge while there will be a 13-person board with eight from Teladoc and five from Livongo.
What about growth potential? Teladoc was seen growing by around 34% in 2021 while Livongo was seen growing near 55%. Post-merger, analysts see a three-year average growth rate in the 30% to 40% range. In 2020 management is saying the combined company will generate $1.3 billion in revenue, which is in line with analyst estimates prior to the announcement if you just add up the two companies’ respective revenue estimates.
Management says it sees $500 million in revenue synergies from cross selling, international expansion, new product introductions, customer retention, etc. This would be on top of the aforementioned 30% to 40% growth rate.
How about the stocks’ performance yesterday (down a lot)?
From my perspective I think these stocks are both somewhat overheated due to the intense focus on digital health right now resulting from the COVID-19 pandemic. This environment has likely pulled forward demand that has accelerated the growth curve by a couple years for both companies, and as a result there will be many more customers using digital health services forevermore (or at least until the next big industry disruption). That’s driven a lot of investors into the names, and I think that reality is evidenced by the deal price, which didn’t imply much premium for LVGO at all.
The question for you is this: Do you want to book a gain in LVGO now and walk away from what could arguably be the most prominent digital health company of this decade? Or do you want to hang in there and see what happens? Or, option three, do you want to book partial profits now by reducing your position size, and let the rest ride?
Like many investments, this is somewhat of a speculation. There are risks to owning. The stocks could be wildly overvalued, the integration of the two companies could be bumpy and a post-COVID-19 world may not be so excited about digital health.
At the same time there are risks to selling. You could be stepping away from one of the great growth stocks of the next decade because … why again? It merged with another great company to try and make an even better company? Hmmm.
At the end of the day let’s recognize we don’t know what will happen but that these were two stocks that were going gangbusters up until two days ago because they both offer defensible growth in a massive market. This merger may mark a top, a pause, or the beginning of the next run, but we won’t know until we have the perspective that only time can provide.
We aim to get into great stocks early and then give them a chance to prove themselves. So far, LVGO has done that, and we’re up roughly 375%. Let’s give it a chance to show us what’s next. Keep holding. If it starts to falter, we can take action then. HOLD