Teladoc Health And Livongo: Market Scrutinizes The Deal
- Teladoc Health agrees to buy Livongo Health for $18.5 billion.
- Livongo Health was already up 400% this year.
- The stock trades at a very elevated 18x 2021 EV/S targets.
- The risk to the story is that reduced virus fears reduce the virtual care growth curve.
After warning just last week of elevated risk at Teladoc Health (NYSE:TDOC), the stock is down nearly 15% following the announced merger with Livongo Health (NASDAQ:LVGO). The company has agreed to pay a massive $18.5 billion for the leading platform to monitor chronic conditions using their inflated currency. My negative investment thesis is further reinforced by the outrageous valuation of this acquisition.
Source: Teladoc Health website
The company agreed to pay $18.5 billion for Livongo Health on the day the company reported quarterly revenues of only $91.9 million to create a so-called leader in consumer-centered virtual care. Yes, revenues grew 125% YoY, but the company remains relatively small for the valuation paid in this deal.
For the YTD period, Livongo is still up over 400% even following the 7% decline following the deal news. The stock traded as low as $15 last October and Teladoc decided to buy the stock for a valuation of nearly $159 per share including $550 million in convertible debt.
The deal involves Teladoc paying Livongo shareholders 0.592 shares of Teladoc Health plus $11.33 per share in cash. With Teladoc trading around $220, each Livongo share is worth $141.57 or only a few dollars above where the stock trades now suggesting limited priced in risk to the deal closing.
The combined company forecasts sales reaching $1.3 billion this year on 85% growth. The adjusted EBITDA target for 2020 is $120 million.
A lot of the promise of the platform is from expectations for driving revenue synergies of $100 million by the second year following the close which would be roughly 2022. In addition, the new entity forecasts $500 million in cross-selling upside by 2025 which is the fifth year after the deal closes assuming a Q4 closing. The absurd mention of $60 million in cost synergies highlights the market's disconnect here.
Source: Teladoc Health merger presentation
Relatively Small Revenues
To get a full view of where the new entity projected sales could go in the next few years, let's look at the combined analyst estimates for the new company.
Teladoc Health revenue targets:
- 2020 - $990 million
- 2021 - $1.33 billion
- 2022 - $1.68 billion
- 2023 - $2.23 billion
Livongo Health revenue targets:
- 2020 - $338 million
- 2021 - $508 million
- 2022 - $741 million
- 2023 - $1.09 billion
Combined entity revenue targets:
- 2020 - $1.328 billion ($0 million synergies)
- 2021 - $1.888 billion ($50 million synergies)
- 2022 - $2.521 billion ($100 million synergies)
- 2023 - $3.470 billion ($150 million synergies)
Even giving Teladoc Health credit from some sizable revenue synergies, the combined company only gets to 2023 revenues of ~$3.5 billion. The company would need 40% revenue growth on a nearly $2.6 billion revenue base in 2022 to reach this target. The stock already trades at 10x aggressive revenue growth targets for over 3 years out.
The company will have the following EV multiples based on the more current 2021 and 2022 revenue targets. The stock trades at ~18x 2021 revenues of $1.9 billion and nearly 14x 2022 revenues of $2.5 billion after factoring in a net cash balance following the payment of $1.3 billion in cash to Livongo shareholders.
In addition, the market has already assumed substantial growth in virtual health care that the risk of a COVID-19 vaccine or treatment isn't factored into the story. My previous research has already highlighted how reduced virus fears could leave the company with flat patient visits next year as the 200% growth in visits in Q2 is absorbed without a crisis next year.
The key investor takeaway is that Teladoc Health top-ticked the market to pay a premium price for Livongo Health with their elevated stock currency. At a best-case scenario where virus fears continue to drive substantial growth, the new entity trades at 18x 2021 EV/S targets. In a worst-case scenario, a COVID-19 vaccine or treatment leads to reduced virtual care demand in 2021 crushing the stock. Investors should avoid Teladoc Health and Livongo Health until more reasonable valuations exist and reduced virus fears normalize demand.
This article was written by
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