The COVID-19 pandemic has provided a major boost to companies in the emerging field of remote healthcare. The use of technology to extend healthcare beyond the doors of clinics and hospitals was already a growing trend coming into 2020, but stay-at-home mandates and the prospect of health facilities being overwhelmed by coronavirus patients accelerated the pressure on medical systems to find ways to treat remotely those patients who could be. The companies delivering these services have seen demand grow quickly.
As you might expect, this phenomenon hasn't gone unnoticed by investors. Two companies that are in leading positions in their niches are Teladoc (TDOC -2.05%) and Livongo (LVGO), and the shares of both have soared this year, by 171% and 352%, respectively.
After such big gains, are either of these stocks worthwhile investments, and, if so, which represents the best opportunity now?
Teladoc and Livongo are both in the business of delivering virtual healthcare to patients, and both market their services to clients such as health plans, employers, government entities, and healthcare providers, which in turn offer them to their members. Both offer strong value propositions to these clients because the telehealth services lower the overall cost of care. And both make most of their money through the subscription fees that their organizational clients pay so their members and employees can access the services.
Although their business models are similar, Teladoc and Livongo occupy different niches in the virtual care universe. Teladoc has a network of more than 50,000 doctors, specialists, and therapists in 450 medical specialties on hand to treat acute and chronic conditions 24/7 in 175 countries. The company delivers virtual telehealth "visits" from health care professionals for patients with conditions ranging from flu to cancer. This can be a significant boon to patients living in remote or rural areas, but many in urban or suburban settings also appreciate the convenience of being able to meet with a doctor, sometimes within minutes of seeking care, without having to travel or sit in waiting rooms. Clients like the substantially lower cost of medical visits delivered this way compared to traditional settings.
Livongo, on the other hand, is focused on self-help for people with chronic conditions, and so far only operates in the U.S. It supplies members with a smartphone app and connected devices such as glucose and blood pressure monitors to help them manage those conditions, particularly diabetes and hypertension. The software provides alerts and lifestyle tips based on monitor data, helps organize health reports for doctors, streamlines the purchasing of supplies, and can connect patients with live coaches. Patients benefit from the feedback and organization, while clients see decreased healthcare costs due to the preventative care provided. The service is offered at no charge to the patient.
Both companies' client and member bases were expanding rapidly even before the coronavirus pandemic. In 2019, Teladoc's revenue grew by 32% to $553 million. Revenue in the first quarter jumped 41% on a 92% increase in visits, and the company issued guidance predicting 47% revenue growth for the year.
Livongo's growth is breathtaking. Revenue grew by 149% in 2019 to $170 million. In Q1 2020, it ballooned by 115% as the company increased its number of clients by 44% from the quarter before. In May, the company said it expects revenue growth in 2020 will be between 70% and 78%, and management will likely raise that guidance when it delivers its Q2 report on Aug. 6.
Neither company is profitable, and both have been raising new capital through the issuance of senior convertible notes to take advantage of their high stock prices and the growth opportunities ahead.
Which is a better investment?
Both of these companies are well-positioned for years of growth, a fact well-recognized by the market now. Some investors may prefer to take a pass on either because of their sky-high valuations, but I think that the stocks will be trading higher in years to come. They could take a bumpy road to those higher levels, but I expect it will be a profitable move to buy either of them now and add to the position when opportunities arise.
Which one is better? I think the best plan is to buy shares of both, which is what I've done. Together, they give an investor good exposure to two complementary facets of virtual care that have plenty of growth ahead.
In a nutshell, Livongo is smaller, growing faster, and has a market valuation -- as measured by the ratio of price to sales -- of about twice that of Teladoc. Teladoc is a bigger company, has a more established history, is growing more slowly, and its shares are cheaper.
I think Teladoc is a safer bet, but I think Livongo's stock will outperform Teladoc's over the next three years. Livongo has higher operating leverage, meaning a high proportion of fixed costs that aren't growing as fast as revenue. As the company adds new clients -- and its opportunity to do that is huge -- a higher fraction of revenue will drop to the bottom line. The company's pitch to clients is pretty much a no-brainer: Its products help the people who use them get healthier, which saves its clients money. International expansion is still ahead, as well.
Both of these stocks have significant risks and high valuations, but I think either or both would make good additions to a growth stock portfolio for the long term.