The Big Mo goes both ways

It’s not unusual for stocks in the diabetes sector to rise during ADA, even when this year ADA was a virtual event. ADA is one of the few times of the year when the sector receives a heightened amount of attention. Yet this heightened attention does not explain the incredible rise in Livongo. Over the past three months shares in the company have risen an astonishing 230%. Back on April 17th shares closed at $37.30, yesterday shares closed at $66.52 and up more in pre-market trading today.

The company now carries a market cap of over $6.5 BILLION. To put that in perspective Tandem carries a market cap under $5 billion. Needless to say Livongo is on a roll and has the Big Mo as everyone has fallen in love with the story. It seems like you can’t swing that poor dead cat without reading yet another positive article on the company or seeing one of the Livongo executives on TV or doing a fireside chat.

Mind you this rise in value is in no way tied to any major piece of news, as far as we know there is no pending acquisition, they have not signed up a huge new customer nor did they release any groundbreaking earth-shattering data at the ADA. Nope shares in Livongo are rising as investors have fallen in love with the story while ignoring basic business fundamentals. Are we surprised? Not at all as we have seen this happen many times before and will see it again in the future.

Most of us are old enough to remember other bubbles, the internet bubble quickly comes to mind. Back then it seemed that any company that was even remotely connected to the internet was receiving incredible valuations based on nothing more than they had a web site. Start ups were garnering millions in capital just because they had a slick PowerPoint presentation. Mundane things like actually making money just didn’t seem to matter it was all about way cool whiz bang.

Are we in the midst of another bubble only this time its digital health that is going gaga? Well when a company like Livongo is worth nearly $7 Billion we think so. Seriously just stop for a moment and think about what is going on here. Remember that the company has virtually no operating history, has only recently gone public and has yet to prove they can consistently deliver on the many promises they have made. And let’s not get started with their interesting accounting and revenue recognition methods.

We don’t blame the folks at Livongo for taking full advantage of the cards they have been dealt. However just because they are holding a pair of aces in the hole does not mean they have the best hand, nor does it mean they will win the hand. As any experienced poker player will tell you the difference between winning and losing is not just about the cards you hold, but the size of your stake, how you use those chips and which cards come out during the flop. As the legendary poker player Doyle Brunson once said; “It’s not the cards that you have all the time that makes you a winner or a loser.”

The only reasonable explanation as to why shares of Livongo are hotter than Georgia asphalt is they have the Big Mo. However these strong tail winds which are pushing the Livongo ship higher can swift and become headwinds in an instant. That Big Mo, which is now in their favor, can also switch and move against them just as quickly.

Some might recall the 2017 Superbowl between the New England Patriots and the Atlanta Falcons. At one point during the third quarter of the game the Falcons held what looked like an insurmountable lead of 28-3. The final score New England 34 – Atlanta 28. Yep the Big Mo swings both ways.