No third option

We have to admit that we are more than dumbfounded at the incredible rise that Livongo is experiencing. Perhaps we should rephrase that as we witnessed something similar with Tandem but with Tandem there was a reasonable explanation as to why their shares went from the outhouse to the penthouse. With Livongo however there is no reasonable explanation.

Therefore we have concluded this is setting up as perhaps the greatest short of all time, and that’s saying something for we used to believe that while Tandem was sinking, they were the greatest short of all time. The other option is that yes there is a greater fool who will come along and buy this company. There is no third option.

On Thursday shares increased $3.81 up another 6.64% closing at $61.16. Over the last 30 trading days shares have increased OVER 73% and no that isn’t a misprint. On a year to date basis shares are up an astonishing 144%. To fully appreciate this dramatic rise back on October 1, 2019 shares closed at $15.92 and since then have risen … wait for it …. Over 250%.

All along this meteoric rise we have questioned the true value of Livongo, which now carries with it a market cap of nearly $6 BILLION. Since we have written extensively on Livongo we shall not repeat our reasoning for our skepticism. Which we continue to believe is warranted. Yet we are not immune to making mistakes and we could be all wrong about Livongo, we don’t think so, but it would be foolish not to consider this possibility.

Still with a market cap near $6 BILLION the stock is approaching a valuation which makes an acquisition very costly. As we have stated consistently the way out for Livongo is a greater fool. However even fools have limits, well maybe not Sanofi but most fools do.

Looking over the possible suitors we have narrowed down the field. Amazon has the money to do it but OneDrop is much cheaper and more likely option should they want to enter the space. Amazon is many things and they are not immune to making mistakes but OneDrop would be a much cheaper mistake to make. Google isn’t interested as they are heavily invested in Verily which is committed to Onduo which does the same thing as Livongo and we think better than Livongo. Apple certainly has the resources but if they are going to do anything big in diabetes, they will acquire Dexcom whom they already have a relationship with.

Therefore it comes down to either Walgreens or CVS as the Livongo platform fits with their respective strategies. CVS seems more likely than Walgreens given their attitude towards acquisitions, this isn’t to say Walgreens does not do deals we just don’t see them doing this deal. Based on their most recent earnings the company has access to over $11 Billion in cash. In the presentation that accompanied the earnings release the company did specifically mention their efforts in diabetes.

Just by way of comparison as Walgreens is no slouch as they too have ample resources. However judging by their earnings announcement and presentation they appear more focused on capital preservation and there was no specific mention of diabetes. Diabetes is as important to Walgreens as it is CVS, they just have a different strategy for getting to the same place and we don’t see Livongo fitting in with that strategy. Plus it should be noted they do have a relationship with Verily.

The question is does CVS want to spend $8 Billion or more to acquire Livongo. Even with no premium at current levels $6 Billion is pricey for a promising yet unproven platform. Again we will not repeat our many concerns with the Livongo business model. This is more problematic given the continued uncertainty of how COVID will impact results. Livongo may make sense strategically but now isn’t the time to take a chance.

Therefore  the stock is setting up as one hell of a short. At the moment everything is going Livongo’s way. But as any experienced craps player knows eventually the dice come up 7. Does anyone seriously believe the stock will continue to the ride it’s been on, that this rocket will not eventually run out of fuel. Listen if a deal was coming any deal why did the insiders sell shares in the low to mid 20’s. The Livongo management team is many things but if any deal was even remotely possible, they would have waited to sell.

Take away the rose-colored glasses and what we you see is a vastly overvalued stock. As we have stated from day one even before Livongo was overly aggressive with their outlook, either they get bought or this house of cards collapses. There is no third option.