What is this “low hanging fruit?” I’d be concerned current growth attests to a Covid spike for TDOC and a small revenue base for LVGO.
This is a valid concern. But annual revenue growth was 32% for TDOC and 148% for LVGO (the difference is one reason I preferred the pure play of LVGO) in 2019 pre-pandemic. That’s quite good. The pandemic lowered regulatory barriers and also raised awareness of telemedecine’s value which should provide some lasting tailwinds post-pandemic, increasing growth. I would bet this is a lasting change in medicine but the growth, especially combined, was already superior.
An important point about TAM. TAM matters when you think a business is too niche – it’s nice to estimate that a company has only tapped 2% of their potential customers, or whatever. A “huge TAM” isn’t something to be excited about. The larger the TAM, the harder the struggle. I’ve been looking at ETSY, and I even took a small position and will probably write it up for the board. But I’m worried their TAM is too huge…can they really compete with Amazon? You or I can start a business and say our TAM is all of retail, but unless we do one thing really well, we’re probably going to go out of business. The only way ETSY succeeds is if they target a portion of that TAM more effectively than their larger competitors. And that’s hard! So is disrupting healthcare.
A large TAM is very important for sustainable growth - the larger the TAM, the longer the runway and the more room for growth before competition becomes problematic. This creates potential which the market will value and price accordingly. I’ve had investments that didn’t pan out due to a limited TAM.
As for ETSY, I also recently opened a small position. Unlike LVGO/TDOC, competitive threats may be more of an immediate concern and their TAM might be an issue as well.
What’s the one thing TDOC does really well? ZM does videoconferencing really well. CRWD does endpoint security really well. FSLY and NET do edge networks really well (notice I didn’t say “edge computing” because that is still nascent). TDOC does…now a jumbled mess of video visits and software to monitor glucose levels and give feedback…and some other things they’re trying to get into. Healthcare is too big. One upstart isn’t going to do it all. Some things will work and others won’t. I don’t think this company will utterly fail, but I don’t think it will grow swiftly or cleanly enough to be a good investment short term or long term. Saying that they have a huge TAM is saying that we’re not really sure what they’re going to do or how they’re going to do it.
I don’t know how well TDOC has differentiated itself from the competition but their pre-pandemic growth indicates their product is well received by the market. They have favorable ratings from both physicians and patients. They are a first mover, allowing them to navigate regulatory hurdles before the competition. Now they also have LVGO which is the premier telemonitoring company. This differentiates them further, likely a lot further. It creates synergies for telemedicine and sales. Furthermore, they might create a network effect which may be hard for later entrants to challenge.
You just named several risks our other companies don’t have to deal with. Our other companies don’t have to deal with regulatory risks, an industry that stifles innovation, a huge merger that’s changing the fundamentals of the business, or the growth-by-acquisition TDOC has had even before this.
But other companies have unique risks that TDOC/LVGO is unlikely to face. Technological change could easily derail our other tech stocks. Cybersecurity, for instance, is littered with hot companies which were sidelined by new entrants with a better mouse trap.
Don’t just place a bet because of grand dreams. We can do better than that.
I’m not betting on grand dreams but on a company with proven growth and increasing opportunities ahead. But I do think it’s important to dream big. A vision or dream of the future may be the most critical element in investing, especially growth investing. That may be one thing I’ve learned here on Saul’s board.
I appreciate your bearish viewpoint. I share all your concerns and limit my bets accordingly. And I invest in multiple other companies here with wonderful growth prospects as well.