Don’t fight a trend

Don’t fight a trend

One thing Momma Kliff taught her boys was never to fight a trend. Although we don’t get it here is the latest from our friends at Livongo who announced preliminary second quarter results this morning.

“Livongo now expects revenue for the second quarter of 2020 to be in the range of $86 million to $87 million, up from prior guidance of $73 million to $75 million. The updated revenue outlook includes approximately $2 million to $3 million of items that management considers non-recurring or one-time in nature. This financial result for the second quarter of fiscal 2020 is preliminary and subject to change in connection with the completion of the company’s quarter-end closing process and the preparation of the unaudited financial statements for the second quarter of 2020.”

In one respect we do get it as Livongo is taking full advantage of the current situation as the competition has yet to mount a serious challenge. Flush with cash the company is aggressively signing up new clients and we suspect aggressively getting members into their program. Given the boost in guidance it goes without saying the stock remains on fire. Our question at this point is how long will this run last as no matter how good it is now these runs always come to an end.

Yet Livongo is not the only digital health company on fire as the entire sector is blazing. According to a report on the MedCity News website;

“Digital health companies once again set a record for funding in 2020, according to a report by Rock Health. They raised a total of $5.4 billion in the first half of the year.”

The article states;

“Despite the devastating economic effects of the Covid-19 pandemic, digital health companies continued to close funding rounds in the first half of 2020. After startups started off the year strong, experts expected investments to flatten off due to the pandemic. But so far, digital health companies are on pace for a record 2020, bringing in a total of $5.4 billion in the first half of the year, according to a report by Rock Health.”

Now some of this funding and strength in Livongo shares is understandable as everyone seems to believe that digital health is here to stay and will transform healthcare. While other sectors are worried about the recent resurgence of COVID, digital health is reaping the rewards. Since no one seems to know when COVID will go away and a vaccine is still not here digital health remains on the front pages.

While we have no doubt that digital health is here to stay and will become another option for patients and providers we just aren’t convinced just yet that it’s the answer to every problem under the sun. As much as we are happy for the Livongo stakeholders let’s be honest here there is no way this company is worth almost $9 Billion. Just by way of comparison Tandem is worth just over $6 Billion and Insulet stands at over $13 Billion. These companies have real products and a proven history.

Maybe we’re just old school but all these valuations in digital health are well beyond irrational exuberance. But as Momma Kliff said many times whether you understand it or not it’s not a good idea to go against a hot sector while the fire is blazing out of control. And this is exactly what we see here a sector that is clearly out of control, one that has lost all touch with reality and will come crashing down it’s just of matter of time. Listen we don’t care which valuation method you use Livongo is not worth $9 billion.

Be that as it may no one likes to consider the end of the bubble as it’s so much more fun to watch the bubble expand. It’s not till the bubble bursts that everyone says see I told you this was a bubble getting set to burst. Well we are not backing away from our Livongo call as this is either the greatest short of all time or they get bought. With an irrational valuation of $9 Billion an acquisition is highly unlikely so we’re very comfortable with our call. We can’t tell you when this will happen or how bad the fall from grace will be all we know is that it’s going to happen.

Anyone who has stood at a hot craps table knows that the dice will eventually come up 7. The smart players will have walked away before that happens perhaps leaving some money on the table but knowing that it’s better to leave money on the table then to walk away with nothing at all. Just saying.