Livongo (LVGO) is a fast-growing company with a very enticing health platform that keeps its members locked in monthly contracts.
I argue that Livongo is cheaper, and that higher gross profit margins are extremely enticing, and that investors paying 52x trailing sales are not paying an irrational multiple to participate in this growth opportunity.
Development at breakneck pace
Source: Author Count, * Updated Guidance; *** High End Company Guidance
Livongo Health provides personal health solutions. Livongo aims to offer its services primarily to people with chronic conditions, but it is attempting to expand into high blood pressure, weight management, diabetes prevention and other markets.
In fact, it can be argued that COVID played a meaningful role in accelerating the demand for virtual care delivery.
Recently, Livongo received a large and lucrative contract with the Government Employees Health Association (‘GEHA’), a strong indication of Livongo’s business model.
High gross profit margin
As you can see below, Livongo has a very high gross profit margin which is roughly around 71% to 74%.
Source: Investor Presentation
But what investors should come to know is that Livongo is rapidly becoming unprofitable in the direction of Brexit. As we look at Livongo’s adjusted EBITDA guidance 2020, the negative is likely to end at $ 12 million.
However, Livongo believes that at some point in 2021, the company will continue to be consistently EBITDA positive.
High incentive management team
Everyone invests differently. Some are more obsessed with a good stock story. Others like strong growth opportunities. I am happy with the strong free cash flow, that is my focus.
And even though the company does not have a sustainable path to free up cash flow, I still need to know that management is driven and properly promoted to bring the company there.
Source: Proxy Statement
Accordingly, given that there is too much skin in the management game, I believe they are properly aligned with their stakeholders.
Valuation – still a significant margin of safety
Livongo trades at 52x trailing sales. This will usually strike me as a bubble-sphere. Remember this is not even earnings, but sales. However, given its fast pace of growth, with its very attractive business model, I can easily see Livongo Basic operations are increasing in this valuation.
Looking at its guidance of $ 300 million for 2020, it puts stock trading up for sale 37x, which many companies are currently trading around in our market, even with more large GAAP losses. Despite.
Noting that, despite all the enthusiasm for the stock, next year’s quest, Livongo’s revenue growth rate is expected to witness a slow decline:
Source: SA Premium Equipment
How does a company grow by more than triple digits by Q2 2020 Very dramatically Slow enough that the rate is expected to increase by less than half in twelve months?
Even if those estimates are too low, and eventually get revised back, investors still need Keep your eye open for potential revenue and unexpectedly slow down your revenue growth rate. And it takes Livongo’s investment risks to be considered.
The number one obvious risk that you are seeing right now is that it is still a GAAP unprofitable company valued by sales. What’s more, 52x trailing sales are many more and stock Doing business with very positive expectations. There is a possibility of a slow running period or even a reversal as the stock comes back from a strong run.
For the fast thesis to work, hopefully A. A large number of members will not block their membership, But it is entirely possible that once members have a habit of monitoring their diabetes with Livongo, members can withhold their monthly membership.
Source: Investor Presentation
Therefore, investors should keep an eye on the estimated value of Livongo, which may mean if the number starts to slow down sharply. They are starting member brainstorming.
Livongo is making all the right noise at the right time, serving the need of members for virtual personal solutions.
What’s more, COVID may be partially responsible for the rapid that was likely to occur over a longer period of time. Furthermore, as members were forced to embrace shelter-in-place, the pace of digitalization was forced on members who otherwise would have avoided this type of digital interaction.
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Disclosure: I / We do not have a position in any of the stocks mentioned, but could initiate a long position in LVGO within the next 72 hours. I wrote this article myself, and it expresses my own opinion. I am not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.