Our fascination continues

Our fascination continues

As most of you have probably guessed given all our references to Star Wars we are big science fiction fans. Prior to Star Wars Star Trek was and continues to be a favorite of ours. As any Trekkie knows one of Spock’s favorite words was fascinating, although Dr. McCoy has some truly classic lines – Damn it Jim I’m a doctor not a magician – is one that we particularly like but let’s not digress just yet. Being a man devoted to logic if we asked Spock what he thought of Livongo being valued at close to $7 billion he’d say – fascinating.

Watching Livongo, until recently, rise like a rocket ship we kept looking for a reasonable explanation. Valued using any of the conventional valuation methods there is no way in this galaxy Livongo is worth $7 billion. Since our views on the company have been stated more than once no need to restate them. What we will say is that we are not changing our view of the company however we are gaining a better understanding of what the Street sees and why Livongo has achieved this lofty valuation.

First and foremost Livongo was in the right place at the right time with the right story. As Momma Kliff used to say timing is sometimes more important than substance. The diabetes epidemic was already well known, digital health all of sudden caught fire and then COVID hits which threw more gas on the raging digital health fire. To their credit the company took full advantage of the cards they were dealt, first with an IPO, then playing the COVID card (which truth be told was one of the greatest bluffs in card playing history) then a convertible debt offering which took advantage of the incredible rise in their share price.

We have wondered why the company in attempt to throw even more gas on the fire hasn’t gone out and acquired anything. Armed with the cash from the IPO now supplemented from the capital from the debt offering the company could easily afford to do a deal. Well according to several sources this deal drought will soon come to end. Just who they will buy is open to speculation, but we expect it to happen in the near future somewhere in the $300 million range.

This cash balance will also help them combat the coming of a competitor, likely more than one, going 100% at risk. As we have stated previously 100% at risk is coming and this strategy could inflict serious damage. However until that happens the company continues to sign up new clients to multiple year deals. Free may be better than per member per month but we doubt the clients who have signed multiple year deals with Livongo will break them. This then places the ball back in the competitions court forcing them to either buy out these contracts or find clients Livongo has yet to sign up.

Now we are about enter an area we don’t normally talk about as frankly we are not experts on this area. Thankfully we know experts who are much smarter than we are and have the additional gift of being able to dumb down things so even we can understand them. These experts told us to pay close attention to the percentage of shares owned by institutions and the percentage of float they control. Based on the latest data institutions own almost 74% of Livongo shares and control just over 80% of the float.

Put in simply terms unless these institutions begin abandoning the stock it likely will not experience a significant decrease in share price. Again as we have stated before we see only two options for Livongo, either they are bought- an unlikely scenario given their current valuation, or this is the greatest short of all time. Yet with institutions owning almost 74% of the shares and controlling 80% of the float they just might give the company a pass should they miss their aggressive revenue projections.

From the start we believed and continue to believe the company will not hit these projections. An event we see occurring in the third or fourth quarter. Yet even with such a miss the damage to share value could be mitigated given the factors explained above. There is no question should this miss happen damage will be done we just don’t know the extent of the damage. Ironically we could be both right and wrong here as such a miss would lower the valuation making Livongo a more affordable acquisition. Go figure.

About the only thing nearly everyone, everyone but Livongo, agrees on is that Livongo is nothing special. What they do is hardly unique and can be easily replicated. As we said when we began they were in the right place at the right time with the right story and then benefited even further from COVID.

So at this point everyone must saying ok are we changing our view on the company. NO absolutely not. However these additional factors we have outlined today help explain what we could not explain. How this company which we see as nothing more than disease management using newer technology has achieved a $7 billion valuation.

Have a great weekend everyone.