TDOC Bear Thesis + My Reponse

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#33

But there are immense green fields and low hanging fruit ahead before these obstacles are likely to come into play. Current growth attests to this reality. And the opportunity or TAM is massive no matter how you estimate it.

Dave,

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.

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.

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.

Bottom Line: Getting excited about a huge TAM without a realistic path of getting there, I’d say is like ogling the forest yet somehow managing to miss the trees that are right there in it.

Don’t just place a bet because of grand dreams. We can do better than that.

Bear

PS Health care in the US is immensely complicated by regulations and powerful entrenched interests. This has caused the cost of care to soar while hindering access and stifling innovation…There will be obstacles and this may slow growth for this company…There are merger risks and health care market risks that are still unpredictable. But I don’t see lesser risks with any of our other growth stocks.

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.

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#34

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.

Bear

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.

Dave

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#35

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.

Exactly. I don’t see this culminating in a company that grows 60% or even 45% in 2021. The slower-growth TDOC side is a lot bigger percentage of the new whole than the hypergrowth LVGO side (which I think will also slow vs the larger revenue comps).

Just wanted to be clear about that as I don’t know if I’ve spelled it out before. I wish you and TDOC the best, and we’ll just have to agree to disagree about their potential and their advantages or lack thereof.

Bear

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#36

Exactly. I don’t see this culminating in a company that grows 60% or even 45% in 2021. The slower-growth TDOC side is a lot bigger percentage of the new whole than the hypergrowth LVGO side (which I think will also slow vs the larger revenue comps).

Just wanted to be clear about that as I don’t know if I’ve spelled it out before. I wish you and TDOC the best, and we’ll just have to agree to disagree about their potential and their advantages or lack thereof.

Bear

Yes, this is a valid concern but synergies (notably in sales), lower regulatory hurdles and lasting tailwinds for telemedicine post-pandemic all favor higher and sustainable growth for the combined company.

Yes, I think we just see things differently. I don’t know if we disagree on the potential as much as the likelihood of reaching that potential.

Dave

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#37

“Exactly. I don’t see this culminating in a company that grows 60% or even 45% in 2021. The slower-growth TDOC side is a lot bigger percentage of the new whole than the hypergrowth LVGO side (which I think will also slow vs the larger revenue comps).”

Bear, always a fan of your opinions, even the ones I disagree with (such as this one).

I haven’t commented much on the TDOC LVGO merger because at first, I wanted to let the dust settle somewhat, and I also wanted to hear Bert Hochfeld’s opinion (sidenote, Bert’s ticker target is just $10/week and you can do a free trial to get all info you need for now. I am keeping the service - seems well worth it to me).

It seems that most people who are bearish on TDOC LVGO share your opinion that TDOC was a a slow grower before the pandemic, therefore it must be a slow grower after the pandemic. The thing is, is that no one knows what will happen after the pandemic. No one knows when after the pandemic will be. Will TDOC get 2 more quarters of pandemic growth or 2 more years? I know that 2 years seems highly unlikely, but people in general have underestimated this pandemic since the get go.

The question of “how long will pandemic boosted growth last” has striking similarities to the question that we must ask for any company at any time - which is, how long will hypergrowth last for (insert stock name here)? CRWD, DDOG, TDOC, ZM, COUPA, TWLO, etc are all fighting against the law of large numbers. Growth will fade for all companies over time no matter what, and no one knows when the slowing down will start or how quickly it will slow. When this starts to happen, we sell. Like we did with TWLO, ZS, NEWR, etc.

Also, doctors and patients like TDOC. They like telemedicine and are not going to want to go back to the way things were before the pandemic. So why would growth slow afterwards? The pandemic, in many ways, has permanently changed the world, such as Zoom and Teladoc. Zoom is not going away and neither is Teladoc.

Lastly, in case people are curious, I have not sold a single share of TDOC or LVGO, which means that when combined, LVGO TDOC takes up 24% of my portfolio. I feel confident to let TDOC LVGO be a top position for me, however, being completely honest with you I do wish that none of my positions were bigger than 20% or so. I am considering selling my TDOC shares (smaller tax consequences) to get the combined position under 20%.

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#38

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.

Bear,

I may be wrong but it seems to me that the one thing TelaDoc (TLDC) does really well is low cost distance health care. Distance health care barely existed before the internet and reliable high quality video conferencing. Problem is, people in general seem to be very wary of talking to nurses and doctors over the internet in spite of the savings in time and money. Understandable as a person’s health is a very intimate topic.

To be honest, I never saw any potential in TDOC as an investment when compared to my other stocks. I estimated growth would be far too slow.

Then along comes covid-19 forcing many people to accept video chat, remote work, online shopping, and many other internet & cloud solutions. Talking to a doctor over the internet must have become a lot more palatable to many people these past few months. And by the way, save a bit money at a time when everyone is particularly aware of the high cost of health care and how tight finances have becoome.

Livongo (LVGO) certainly complicates the company yet I can see the potential synergy in providing low cost (cost saving) remote health care solutions.

The big wrinkle, as others have pointed out, is that the health care establishment won’t easily give up its patients to a new operating model. Only time will tell if people’s desire for these new solutions will offset the established health care giants. Before covid-19 I would have said not a chance. Now … It may be possible.

As a health care consumer, I see the merger as a good thing.
As an investor I see a lot of potential in this company for steady growth.
As an investor of hyper-growth stocks I don’t have enough information.

I have been in and out of both of these companies more than once. At the moment I have a small position while I watch and learn and wait for more information on what the future will bring.

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#39

“Don’t just place a bet because of grand dreams. We can do better than that.

Bear

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.

Dave“

Interesting discussion. While grand dreams have kept me in names like AAPL since 2003, great analysis has moved me out of stocks like SHOP at 150, NVDA at 250/300.

TSLA is a great example of a company and a CEO I finally decided to take a chance on last year. I entered to stock at 375 with a 50k investment. I love investing in leaders like Bezos and Hastings, so I finally decided that even with Musks crazy quirkiness, he had something very special and I’d take the chance, even if it felt more like a dream investment. Two weeks later I read a scathing and well presented post On the MF TSLA board that scared the bejesus out of me and moved me out of the stock at 425. I gave up on my dream of taking a chance on Musk and let well thought our fundamental analysis be my guide. Oh what a mistake that has turned out to be.

As for AAPL, on a historic day like today when AAPL becomes the first company to ever cross into the two trillion dollar market cap area, I remember the dozens of times I could have sold out of the stock because of fundamental analysis. It’s overvalued, it’s growth is slowing, the competition, no new products. So many reasons to sell.

What’s even more interesting to me is that back when I first bought AAPL in 2003 the market cap was 7.8 billion, which is lower then just about every cloud name that’s discussed on this board today. In 17 years AAPL grew from a 7.8 billion market cap to over two trillion dollars. Amazing. No really amazing.

Which I have to wonder, is there another company that will be the next AAPL, that will have that kind of mind blowing phenomenal growth, and will anyone have the patience to hold that stock for a decade or longer?

TMB
Still holding my original positions in AAPL, AMZN, NFLX. Wish I held my SHOP, TSLA, and a large handful of others.

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#40

In teledentistry, I now have different codes that I can bill out for different reimbursements. One code that utilizes video and one code for without video.

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#41

First off, let me say again how much I appreciate the makeup of this board. I have no other source of information like this where people are going into deep discussions about these stocks and where there is input from people who have expertise working in these fields. I also really enjoy seeing both sides of the argument - bull and bear.

A few thoughts regarding the thread on TDOC/LVGO. I will compare TDOC with AMZN (I am not saying that TDOC = AMZN, I am just using it as a point of reference)

  • Amazon started very small and focused on a specific area of a much larger TAM. TDOC = same.

  • At first people were nervous about buying things online with AMZN and giving their financial information to companies online. From my own personal experience, I only bought a few things the first year I ever started using Amazon and that slowly increased over time as I developed comfort and familiarity. I have not yet personally used TDOC, but I can definitely envision myself starting to use it for certain things in the future. I think as people use it they will become more comfortable with it and it could become the “go-to” name in the same way that Amazon is the “go-to” name for Internet purchases.

  • Amazon expanded into more and more areas over the years once they had a solid base established. We do not know if TDOC will be successful in this, but we can envision lots of different ways in which it can be expanded in the future.

  • With regard to “fighting the establishment” - Amazon destroyed the establishment. The retail establishment was gigantic and powerful and wealthy - and much of it was obliterated. Did Amazon destroy all of the establishment - no. Walmart and target and SHOP are all doing pretty well. However, Amazon destroyed enough of it to become one of the largest companies on the planet. TDOC does not need to displace the entire establishment - there is plenty of room for them to grow for many years at a high rate. Can they accomplish that? Only time will tell - but they are the clear leader at the moment.

  • One of the things that MF stresses is “optionality”. AMZN had that. TDOC and LVGO have that. There are lots of different things they can potentially expand into.

  • A lot of the comments I have read center around American healthcare. One of the things I have read in other sources is that there is a lot more need for health care efficiency in some other countries. Specifically related to Canada and England, I have read things stating that the wait time for getting into a doctor can be extraordinarily long. TDOC has the potential to have a big impact in something like that.

For me personally, I have decided to stay in LVGO for now and see how it plays out.
However, as I mentioned elsewhere I previously sold calls that expire this week and I will be forced to sell a portion of my holdings in LVGO. I will still have a very large position after the sale, so I’m going to re-deploy the proceeds into others that I have less of (CRWD, FSLY, NET, GH specifically).

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#42

I was speaking to a healthcare professional and his take is that normally patients wait for doctors in clinic but with tele-medicine its the other way round and patients join in late or have issues with technology or basic data that normally a nurse would collect . As an average a doctor takes 7 minutes for a patient and with tele-med its a lot more and that means doctors who are the biggest stakeholders are not seeing that benefit - unless this gap is bridged this could be just a short term tailwind until the COVID vaccine is approved.

The other issues is that the payment for tele-med is below the physical visit where the doc controls the pricing

food for thought

Rajesh

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#43

Funny thing is that my wife, who’s an NP, is the Bull on TDOC and I remain a bit more Bear. The question I ask her and would put forth to the group is: What does TDOC do that her Health Care System (HCS) doesn’t currently do or couldn’t do at the push of a button?

Her HCS runs a 24 hour telemedicine system through video or audio and it works well. A staff nurse, NP or Dr. picks up every time. Her HCS has specialists in oncology, cardiac, etc. Her HCS also has physical locations with testing and labs. Where is TDOC’s advantage? What is the revolutionary technology TDOC has that will disrupt medical delivery? Can they coexist, yes. But what is the disruption?

Eventually patients will return to physical locations for more complex cases (ICU, ONC, OT, CCU, NICU) while both TDOC and the HCS will continue Video/Audio for lower/routine level visits. At that point, what’s the differentiator?

To be transparent, I opened a small position in TDOC at her insistence back in November 2018 and it’s performed very well (as I’m constantly reminded of at home) but neither she nor I can determine an advantage beyond brand awareness or potential scale. Open to your thoughts.

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#44

At that point, what’s the differentiator?

IMHO by acquiring LVGO TDOC is seeking to enhance its differentiation . Unlike the usual teledoc services TDOC be able to offer services whose success is based on AI methods shown to save considerable sums and achieve success in controlling (at least) T2D. There seems to be great interest in replicating this achievement for other illnesses. A number of posters here have questioned whether the success with diabetes can in fact be replicated for other conditions. I certainly don’t know, but TDOC
management and TDOC investors seem to be betting on exactly that.

#45

As an average a doctor takes 7 minutes for a patient and with tele-med its a lot more and that means doctors who are the biggest stakeholders are not seeing that benefit - unless this gap is bridged this could be just a short term tailwind until the COVID vaccine is approved.

Any doctor whose prime worry is getting my money in seven minutes is a doctor I don’t want to see.

Denny Schlesinger

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#46

who’s an NP

non-professional?

Denny Schlesinger
hates alphabet soup

#47

From the context, I would say Nurse Practioner.

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#48

who’s an NP

non-professional?

Funny. Be sure to use that one on your next visit.
No, Nurse Practitioner. Graduate or Doctorate Degree. All of the same duties as a General Practitioner (diagnosis, referrals, prescriptions.) Basically between a Dr. and Registered Nurse.

#49

the last 2 telehealth visits I made were with Zoom. Both had problems, apparently at their end. The nurses are phoning me 15 or 20 minutes before the appointments to see if I am connected. Both times the problems were fixed before the appointment. I think nurses have become experts.

#50

What does TDOC do that her Health Care System (HCS) doesn’t currently do or couldn’t do at the push of a button?

TDOC sees LVGO addition as helping build differentiation from other HCS offerings. Similar to the Intouch acquisition.
They particularly like LVGO’s high engagement (150 Million data points added just last Q!), high net promoter scores, and the fact that customers love it. Customers are constantly engaging with Livongo. Tullman always says we meet the customer in their life flow. This is a very important factor. So this will increases platform stickiness and that will be TDOC’s moat.

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#51

Agree, LVGO enhances differentiation (and margins) for TDOC… while TDOC can super charge LVGO new patient acquisition…

On HCS vs TDOC, big differentiation to consider is potential for TDOC as low cost leader… e.g. becoming defacto first choice for self buyer with high deductible (gig workers) / under-insured / non-insured population… (number of which unfortunately will grow with current pandemic driven job losses)…

Today large portion of this population have to pay much higher price per visit to traditional HCS… TDOC can (not sure if it does already or not) offer a lower cost direct subscription or just fee per visit type of tele-health option… potential here is enormous…

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#52

I was speaking to a healthcare professional and his take is that normally patients wait for doctors in clinic but with tele-medicine its the other way round and patients join in late or have issues with technology or basic data that normally a nurse would collect. As an average a doctor takes 7 minutes for a patient and with tele-med its a lot more and that means doctors who are the biggest stakeholders are not seeing that benefit - unless this gap is bridged this could be just a short term tailwind until the COVID vaccine is approved.

The other issues is that the payment for tele-med is below the physical visit where the doc controls the pricing

These are two good points. The first is fixable, the second is tolerable, if the first gets fixed.

MOTIVATION FOR IMPROVEMENT:
Patients: An online doctor visit is fast and convenient. There is a risk to all people, but especially aging people, just going into a hospital, where there are communicable diseases and nasty bacteria and viruses outside of COVID. Also, but less so, with a doctor’s office visit (where they aren’t the same place). Any chance to get seen and treated without that risk is a good thing, if you can trust the answers you get from the visit. The first meeting may have all the answers that make the in-person meeting unnecessary.
Doctors: Many things can be handled via telemedicine, if it is done right. Smaller waiting rooms. You can also spot what needs in-person treatment.
Insurers: Risks of secondary infections picked up at the hospital are lower, and in-person visits can be reserved for those really necessary.

WHAT IS NEEDED TO DEVELOP RELIABLE TELE-MEDICINE VISITS? IT CAN’T BECOME “NORMAL” UNTIL YOU HAVE THESE CONDITIONS MET:

  • High enough resolution video and/or photography. Doc wants to see the face of the person talking with them, get the micro-expressions and nuances. Facial coloring: Is the patient’s face too red, indicating an infection under the skin? Is there an paleness/palor that compares poorly to the photo the doc has in the office? Doc wants an image of a wound or patch of skin to decide if an in-person visit is needed. Cameras are pretty good these days. They can only get better. A high-resolution camera with broad spectrum (good color down to infra-red) is required. Maybe modern cellphones have that good a camera. Some research is needed to tell you if it is good enough at the right price.

  • Good audio: Standard cell phone audio is not good enough to hear the voice correctly. Even landline telephones trim too much of the voice sound to get the full voice experience, but it is still so much better than a cell phone. The doctor wants to hear if you sound “weak” or strong. If you want to “hear” the tone of your patient’s voice, and relative strength or weakness, the audio (and video) needs to as good as in person, and integrated with the image. That is NOT HARD. You need a good microphone and good speakers on the other side. As an aside: The only reason cell phones sound so bad is that they wanted more customers in the radio bands they already paid for. Digital cellular puts three times as many in the same band as the original analog phones that sounded so much better.

  • Reliable broadband internet or radio connection. The video and audio, done right, will probably take 25-50 million bits per second. In cities now, carriers are competitively offering billion bits/second connections. You need to define the medical protocol connection, such that the data packets are guaranteed to arrive and be reconstructed correctly. That quality isn’t guaranteed with the statistical multiplexers used to pack cable TV entertainment and internet now, but it can be carved out of the carrier’s bandwidth with a few regulations and some good engineering.

  • Low cost, infrequent-use medical measurement kits: You can buy devices to do electro-cardiograms for $100-$200. You can buy blood pressure measurement devices for $50-$100. Blood analysis can be cheap as well. As telemedicine evolves, the providers will develop “kits” for home use and send to clients to keep on hand to prepare for and participate in online visits. They will smoothly integrate with cellphone or laptop software. My wild guess: That is already in development, along with the software to collect data from the kits.

  • Preparation procedures and “process”. The weak link is usually humans. The human must follow a simple process, and the nurse or administrative person setting up before the doctor comes on line must ensure they got it right. Else let the doc go on to the next client and let the patient re-read the instructions and reschedule the visit.

All this is possible given just the technology we have today. Will TDOC do it? Maybe. Someone will.

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