Since the beginning of the year, Teladoc Health's (TDOC 6.88%) stock price has risen by more than 146%, as the COVID-19 pandemic has led to surging demand for online physician visits. Likewise, Livongo Health (LVGO +0.00%) stock is up more than 418% this year thanks to rising demand for its namesake app, which provides virtual health management for patients living with diabetes. Especially given the Aug. 5 announcement that Teladoc will be acquiring Livongo, these growth rates may have shareholders asking whether Teladoc could turn them into millionaires.
It's certainly possible, thanks to Teladoc's growing momentum. While the market did react unfavorably to Teladoc's announcement -- its stock was down nearly 20% that day -- it's worth remembering that its $18.5 billion acquisition of Livongo will undoubtedly make the combined entity the No. 1 leader in virtual-health consulting. With this in mind, let's examine why Teladoc's momentum is far from over.
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The timing couldn't be better
Under the terms of the deal, Teladoc will pay $18.5 billion. This will consist of 0.592 shares of its own stock for each share of Livongo and approximately $1.1 billion in cash. Combined, the two companies will have $661 million in cash and $1.9 billion in debt after the merger. While the debt may seem like a lot, I believe it's nothing compared to the two companies' future potential.
During the second quarter of 2020, the number of paid Teladoc members increased by a staggering 92% year over year, from 26.8 million to 51.5 million. At the same time, the company's total paid visits grew by 203%, to nearly 2.8 million from 908,000 in Q2 2019. Similar trends were witnessed at Livongo, where the number of people using the company's app for diabetes management was up by a whopping 113%, to 410,000.
Much of the crazy growth for both companies can be attributed to the coronavirus pandemic, and corresponding stay-at-home orders to mitigate its spread. That said, I think there has never been a better time for the two companies to merge, because their growth due to the COVID-19 outbreak may be here to stay. There has never been a pandemic in recorded history without a second wave, and the coronavirus is mutating, which may render older models of vaccines in clinical trials invalid.
An estimated 70 million people in the U.S. have access to Teladoc, while more than 147 million Americans living with chronic illness could potentially make use of Livongo's expertise. About 25% of patients will potentially exhibit an overlap between Teladoc's virtual-care market and Livongo's chronic-illness market.
Takeaways for investors
Right now, Teladoc has a market cap of $16.4 billion, while Livongo has a market cap of $12.5 billion, for a combined market cap of almost $30 billion. Meanwhile, the two companies combined are on track to generate $1.3 billion in revenue and $120 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2020. In other words, the new company after the merger will trade for 22 times price-to-sales and 241 times price-to-EBITDA.
If that sounds very expensive, it certainly is, considering the healthcare information and technology sector is trading for about 4.9 times price-to-sales as a whole. However, it is necessary to evaluate what investors are getting from all angles. Note that Teladoc management expects 85% year-over-year revenue growth from the new company.
Furthermore, the two companies will be partners in a $45 billion market for telemedicine and a $46.7 billion market for treating chronic conditions, meaning a combined $91.7 billion global market opportunity. By 2025, the two companies expect to realize a total of $500 million in revenue synergies, $60 million in cost-saving synergies, and 2% to 3% of expansion every year in adjusted EBITDA margins.
Hence, I think while Teladoc's shares are undoubtedly expensive on a one-year time frame, they are rather undervalued relative to future potential. If investors buy now with just $10,000, and Teladoc stock's rate of return this year continues, then it will only take five to 10 years before their initial investment is worth over $1 million. That said, nobody should be putting all of their savings in a single stock due to the risks involved -- and it's especially important to note that Teladoc's growth rate may slow after the pandemic subsides.
For investors looking at a long-term horizon, an ongoing multibillion-dollar merger between two of the most prominent leaders in telemedicine may offer the best opportunity to buy some shares.
