Livongo: Surprisingly, this action is still undervalued (NASDAQ: LVGO)

Investment thesis

Livongo (LVGO) is a fast growing company that has a very attractive healthcare platform that keeps its members locked in monthly contracts.

I argue that Livongo is cheap, and that its high gross profit margins are very attractive, and that investors who pay 52 times final sales do not pay an irrational multiple to participate in this growth opportunity.

Growth at a breakneck pace

Source: author’s calculations, * updated guidance; *** high-end company guide

Livongo Health offers personalized health solutions. Livongo targets its services to people with chronic conditions, primarily diabetes, but is trying to expand into hypertension, weight management, diabetes prevention, and other markets.

In fact, it can be argued that COVID has played a significant role in accelerating the demand for virtual care.

Livongo recently obtained a large and attractive contract with the Government Employee Health Association (‘GEHA’), which is a strong vindication of Livongo’s business model.

High gross profit margins

As you can see below, Livongo has very high gross profit margins that are largely around 71% to 74%.

Source: Investor Presentation

But what should also be highlighted for investors is that Livongo is rapidly moving from being unprofitable to breakeven. If we look at Livongo’s adjusted EBITDA guidance, 2020 will likely end in a negative $ 12 million.

However, Livongo believes that sometime in 2021 the company will have positive sustainable EBITDA.

Highly incentivized management team

Everyone invests differently. Some are more obsessed with a good stock history. Others prefer strong growth opportunities. I am happy with strong free cash flow, that is my approach.

And even though the company doesn’t have a sustainable path to free cash flow right now, I need to know that management is driven and properly incentivized to get the company there.

Source: Declaration of Power

Consequently, since management has so much skin in the game, I think its interests are properly aligned with those of the shareholder.

Valuation: still a significant safety margin

Livongo is trading at 52x final sales. This would typically seem like bubble territory to me. Remember that it is not even profit, but sales. However, given the rapid pace of growth, coupled with its very compelling business model, I can easily see Livongo fundamental operations that grow in this valuation.

Looking at his 2020 guide to $ 300 million, this puts stock trading for 37x sales, which many companies are trading in our market today, despite incurring even greater GAAP losses.

That said, despite all the enthusiasm for the action, with a view to next year, there is an expectation of a sharp slowdown in Livongo’s revenue growth rates:

Source: SA Premium Tools

How does a company from the second quarter of 2020 grow to more than three digits, to so dramatically slowdown so that less than half of that rate is expected to grow in twelve months?

Even if those estimates are too low and ultimately revised again, investors still need to Be on the lookout for the potential and unexpected slowdown in your revenue growth rates.. And this takes into account Livongo’s investment risks.

Investment risks

The obvious number one risk you’re looking for right now is that it’s still an unprofitable GAAP company that is valued from sales. What’s more, the final sales multiple 52x is high and the stock is trading with very high positive expectations. There is likely to be a period of slowing down or even reversing as the stock pulls back from the strong run it has been in.

For the bullish thesis to work, there is an expectation that a large number of members will not stop their subscription, but it’s entirely possible that once members get used to having their diabetes monitored with Livongo, they can suspend their monthly subscription.

Source: Investor Presentation

Therefore, investors should be vigilant about the estimated value of Livongo deals, if that number starts to decline rapidly, it could mean that the members are starting to produce.

The bottom line

Livongo is making all the right noises at the right time, serving members’ need for custom virtual solutions.

Furthermore, COVID could have been partially responsible for accelerating what would probably have taken place over a longer period of time. Additionally, as members were forced to adopt a shelter-in-place, the pace of digitization was forced on members who would otherwise have avoided this type of digital interaction.

Strong investment potential:

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Divulge: I / we do not have positions in any of the actions mentioned, but I can start a long position in LVGO for the next 72 hours. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.