Livongo (LVGO) is a fast growing company that has a very attractive health platform that keeps its members in concluding 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 the final sales do not pay an irrational multiple to participate in this growth opportunity.
Growth in Breakneck Pace
Source: author’s calculations, * updated guidance; *** top management of the company
Livongo Health offers personalized health solutions. Livongo focuses its services on people with chronic diseases, especially diabetes, but seeks to expand into hypertension, weight management, diabetes prevention and other markets.
In fact, it can be argued that COVID has played an important role in accelerating the demand for virtual care.
Livongo recently won an extensive and attractive agreement with the National Association of Employee Health (“GEHA”), which is a strong confirmation of Livongo’s business model.
High gross profit margins
As you can see below, Livongo has very high gross profit margins, which usually range from 71% to 74%.
Source: Investor presentation
However, investors should also be aware that Livongo is fast becoming unprofitable towards a breakthrough. If we look at the adjusted EBITDA guideline for Livongo until 2020, it is likely to end up at a negative $ 12 million.
However, Livongo believes that in 2021 the company will have a sustainable EBITDA positive.
Highly motivated management team
Everyone invests differently. Some are more obsessed with a good story about events. Others prefer strong growth opportunities. I am satisfied with the strong flow of free money, that is my focus.
And although the company does not currently have a sustainable path to free cash flow, I need to know that management is motivated and properly motivated for the company to get there.
Source: Proxy statement
Therefore, I believe that given that management has so much skin in play, their interests are properly aligned with those of the shareholder.
Valuation – still a significant safety margin
Livongo trades with 52x end sales. Usually it would occur to me as a bubble area. Remember that it is not revenue but sales. However, given the rapid growth rate and its very convincing business model, I see Livongo basic operations growing up to this valuation.
Looking at its $ 300 million guideline to 2020, this leads to stock trading at 37 times the sales that many companies currently trade in our market, despite even higher GAAP losses. .
However, despite all the enthusiasm for next year’s shares, Livongo’s revenue growth is expected to slow significantly:
Source: SA Premium Tools
As the company leaves Q2 2020 and grows to more than three digits so dramatically a slowdown so that just under half of this rate is expected to grow in twelve months?
Even if these estimates are too low and ultimately revised, investors still need them watch out for potential and an unexpected slowdown in revenue growthAnd it takes into account the investment risks of Livongo.
One of the obvious risks you’re looking for right now is that it’s still a unprofitable GAAP company with value in sales. What’s more, 52-fold end sales are higher and stocks are high trading with very high positive expectations, There is likely to be a period of slowdown or even reversal as stocks withdraw from the severe period in which they have been.
For bull work to work, there is an expectation that a a huge number of members will not stop their subscriptions, but it is quite possible that when members get used to monitoring diabetes with Livong, members can stop their monthly subscriptions.
Source: Investor presentation
Investors should therefore monitor the estimated value of Livongo’s agreements, if this number starts to slow down rapidly, it could mean that members are starting to spew.
Livongo makes all the right sounds at the right time and serves members’ needs for virtual personalized solutions.
Moreover, COVID may have been partly responsible for accelerating what is likely to have happened over a longer period of time. Furthermore, as members were forced to take refuge, the pace of digitization was forced by members who would otherwise avoid this type of digital interaction.
Strong investment potential:
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publication: We have no positions in any of these stocks, but we can initiate a long position in LVGO over the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose shares are listed in this article.