Take me out to the ballgame

Take me out to the ballgame

There is just something special about opening day. There may not be fans in the stands, the crowd noise isn’t real, but baseball is still baseball and in this crazy COVID world we now live in it’s great to have baseball back. How long this will last no one knows but as long as it lasts let’s enjoy it even though fun at the old ballpark will be restricted to players. Hopefully in the next week or so the NHL and NBA will also return, and life will get back to whatever normal has become.

What’s not returning to normal is the crazy sky high artificially inflated value of Livongo. At last look the company continues to add “value” which makes no sense whatsoever. Yesterday shares closed at $111.35 and have gained over 344% on a year to date basis and no that is not a misprint. Its market cap is now approaching $11 Billion and no that is not a misprint either. Shares continue to increase in value even though several well-heeled competitors have emerged, and more are on the way. These are not fly by night companies but real competitors who have the resources to compete with Livongo.

While we are thrilled for Livongo’s stakeholders and management team, who continue to get richer by the day, this sky high artificially inflated value isn’t sustainable over the long haul. It also places existing stakeholders who do not protect themselves at greater risk. As we have stated from day one there are two paths for Livongo – the great fool path or the greatest short of all-time path. With a market cap of nearly $11 billion the greater fool path is becoming increasingly unlikely which means the greatest short of all time is becoming more possible.

Given that company has pre-announced second quarter results we doubt shares will tumble much when they have their official earnings call on Thursday August 6th. It’s possible something will be said that causes a slid, but we are betting on that. No the real slide for Livongo won’t happen until later this year or perhaps early next year. This is when we’ll find out if management can actually run the company or if they are just another flash in the pan. Not to be redundant but as we have stated many times what the company does is hardly unique and very easy to replicate.

Yet the more we investigate the company the more we realize that this crazy valuation is a combination of two things, incredible timing and too few available shares. These two factors, with a good dose of chutzpah thrown in, have created a simple supply and demand problem. Too few available shares being chased by increasing investor demand. When demand is high, and supply is tight the price has nowhere to go but up. It does not matter if you are selling Cabbage Patch dolls or shares of stock.

Rarely if ever do we get into the technical details of how any stock trades. More often than not we look for the reasons behind share movement. Yet with Livongo technical factors are directly related to share movement. According to the latest available data institutions control over 80% of the float, which is the number of shares actually available to be traded. Just for comparison purposes Dexcom has a float of over 100% as does Insulet and Tandem (well 99% so close enough). According to the Investopedia website:

“A stock with a small float will generally be more volatile than a stock with a large float. This is because, with fewer shares available, it may be harder to find a buyer or seller. This results in larger spreads and often lower volume.”

In Livongo’s case we have yet to see volatility, but we have seen what happens when lots of money is chasing too few shares. The question is how long can this continue and what will happen will more shares become available. The fact is long term the current Livongo business model is NOT sustainable. UnitedHealthcare, not exactly a lightweight, has already noted they will enter the field with a FREE program. Omada Health, no lightweight either, is also coming as is Onduo, who just happens to be backed by Google.

We would have thought by now that Livongo would use their newfound wealth to grow via acquisition. That they would bolt on a company that would enhance their platform and bring in revenue. They have the resources plus their inflated stock value to do a deal. Yet as much as everyone expects a deal nothing as of yet which seems reasonable as Livongo just might be finding slim pickings at inflated values out in digital health land. Ironically the same issue that’s preventing Livongo from getting acquired is preventing Livongo from finding an acquisition of their own. This sector is hotter than Georgia asphalt and is incredibly over-valued.

Listen we have seen stock market and sector bubbles before, and this is exactly what they look like. It’s not a question of if the bubble bursts but when and how bad it will be. There’s lots of cheap money around, digital health is the hot place to be and with COVID not going away anytime soon it’s likely the temperature will only get hotter. Simply put there is still room for more air in the bubble.

So how does this all play out? Well for Livongo it should go something like this – the insiders will be the first to bail, followed by the Venture investors and finally the large stakeholders leaving individual shareholders to pick up the pieces. Some of this insider selling has already begun and to be quite honest we cannot blame these people, but they would not be selling if they thought a buyout was imminent.

No, for the time being this pub crawl continues and the beer is flowing freely. Like the absent Bleacher Bums who every opening day say this is the year for their beloved Cubbies hope springs eternal and yep every 100 years or so they are rewarded with their optimism. However most years our north side friends end up crying in their beer. So enjoy the fun while it lasts and remember when it comes to baseball in Chicago it’s the South Siders who rule, GO SOX.

Enjoy the weekend everyone.