I’ve mentioned before that LVGO was my largest holding, by 30% more than #2 and #3 (CRWD and ZM). Not that large compared to many here, as it’s “only” over 15% with the next ones being 10% holdings. After the surprise announcement last week, I was considering reducing my LVGO down to around the 10% range (never considered selling out), but after some reflection over the weekend regarding the merger/acquisition with TDOC, I’ve decided not to sell a single share (may even add!). LVGO was, and the new company will also be, the right company, with the right product, in the right place, at the right time. Don’t know that they’ll be an ultimate winner, but they’re currently doing better than anyone else, at attempting to transform an absolutely massive industry that is ripe for disruption!
Some napkin math…
The most recent YOY growth and current P/S of the 2 companies, and then what the combined company would be based on today’s numbers, followed by my estimate of the combined company’s numbers in a year (with no market cap increase):
Growth P/S
Current LVGO 119% 51
QTR #s TDOC 85% 24
Combined TD/LV 99% 31
**My next yr TD/LV 60% 21**
**estimate**
For the combined company growth (per the release, combined company would be 42% LVGO, 58% TDOC), so I took 42% growing at 119% (remember, there was a one-time $2.5M benefit that reduced their announced 125% growth to 119%) and 58% growing at 85%, gives a combined company growing at 99% currently.
For the P/S, I added their current market caps to get $30.4B, divided by their combined TTM rev to get $974M, gives a combined P/S of 31. Taking a page out of the way Bert looks at things, a growth cohort of 100% should have a higher P/S than 31 (even with a slightly lower gross margin than our software companies). Definitely room to expand it’s valuation once the market gets over it’s distaste of this deal.
For my next year estimate of the combined company, I assumed the LVGO rev would be up 80% a year from now (more on that later), and the TDOC rev would be up 40% (giving a combined growth rate of 60%). That nets total rev of $1.47B, on current combined market cap of $30.4B is a forward P/S of 21. Based on today’s P/S ratios of companies growing 60%, this should be around 35-40, not 20, so I can see a near double here, just from multiple expansion (yes, I’ve left out dilution, and countless other things, but after all, this is just ballpark napkin math).
Why do I think LVGO could almost double it’s rev in a year? For those that haven’t seen them, here are the numbers for LVGO (bold are my estimates):
Revs Seq Rev YOY Rev TTM Rev TTM YOY
Growth Growth Rev Growth
1Q18 $12
2Q18 $16 28.2%
3Q18 $19 17.5%
4Q18 $21 12.9% $68
1Q19 $32 51.2% 157.3% $88
2Q19 $41 27.5% 155.8% $113
3Q19 $47 14.1% 148.4% $141
4Q19 $50 7.9% 137.5% $170 148.4%
1Q20 $69 37.0% 115.2% $207 135.0%
2Q20 $90 30.4% 120.1% $256 126.7%
**3Q20 $99 10.0% 112.2% $308 119.0%**
**4Q20 $104 5.1% 106.5% $362 113.0%**
Triple digit growth every quarter for the past 2 years. I got my estimates for Q3 and Q4 by reducing last years sequential increase QoQ from 14% to 10% for Q3 from Q2, and from 8% to 5% for Q4 from Q3. If they hit those estimates they will still show triple digit growth on their own for the rest of this year. I’m trying to be conservative here, as I actually think they could increase those QoQ numbers, as they did during Q2, from 27% to 30% with the Covid tailwinds they’re seeing (Covid effects are going to be here for awhile), and thus end up around 120% growth for both of the remaining quarters of this year.
And don’t forget their non-GAAP EPS improvement, here are the last 2 years:
3Q18 -0.55
4Q18 -0.58
1Q19 -0.27
2Q19 -0.09
3Q19 -0.05
4Q19 0.02
1Q20 0.03
2Q20 0.11
Short term, I would have preferred LVGO stayed independent, I think their stock price would have continued to increase with the growth they’ve been showing and will continue to show. But as I’ve thought about it, long term, I think this is going to be a very good thing for them because of the available cross selling opportunities (as others have pointed out), and also, as it opens up the international markets for them, which will be huge, long term (look what that did for Netflix).
I don’t care about the LVGO stock price being tied to the TDOC price for the next 2 quarters (or however long until the deal is completed), because if the companies keep operating at the high level they have been, then the TDOC price will be going up, too.