If you like to buy fast-rising stocks on the dip, Teladoc Health (NYSE:TDOC) might be right up your alley. Shares of the telehealth leader had nearly tripled year to date coming into August. Then Teladoc announced plans to merge with Livongo Health (NASDAQ:LVGO). And its shares promptly plunged more than 20%.
Clearly, many investors don't like the pending deal to combine with Livongo. But is Teladoc Health stock a buy after its pullback?
Impact of the merger
Livongo shareholders will receive 0.592 shares of Teladoc plus cash of $11.33 for each share of Livongo that they own. There are two ways this transaction impacts Teladoc in the near term.
First, the deal dilutes the value of its existing shares. That's going to happen when a company has to issue more than 58 million new shares -- boosting Teladoc's outstanding share count by over 70%. Second, Teladoc will have to hand over $1.12 billion. The company had $1.31 billion in cash, cash equivalents, and short-term investments at the end of June.
Over the longer run, though, the merger with Livongo will dramatically expand Teladoc's scope. Livongo's chronic disease management platform is already used by more than 30% of the Fortune 500. The two companies are already dreaming up ways that the combination of Teladoc's virtual care platform and Livongo's platform can provide end-to-end virtual healthcare.
Assuming the transaction closes, the "new" Teladoc Health will generate annual revenue of close to $1 billion. And the combined entity will likely be able to grow revenue by up to 40% annually over the next three years.
What won't change
There's one key thing that won't change with Teladoc's merger with Livongo: the huge opportunity for virtual care. Teladoc currently has more members with its existing corporate clients that don't use telehealth than members that do use telehealth. The company has a built-in growth market.
And there are many more people that aren't with current Teladoc clients in the U.S. and throughout the world. Teladoc estimates that it has captured less than 1% of the addressable global market so far.
The COVID-19 pandemic is making it a lot easier for Teladoc to attract new members. Patients are discovering that using virtual care is much more convenient than visiting a healthcare provider's office.
While Teladoc will enter the chronic disease management market with the Livongo merger, the opportunities in that market won't diminish. Around 147 million people in the U.S. have a chronic condition, representing an addressable market of nearly $47 billion per year.
Is Teladoc a buy?
Some might worry that Teladoc is paying too much to merge with Livongo. Others might be concerned that the company is taking its eyes off its core telehealth market. I disagree on both counts.
My view is that the global virtual care market, including telehealth and chronic disease management, is so big that Teladoc should be able to keep growing at a rapid pace for years to come. I also think that the addition of Livongo's platform will give Teladoc a competitive advantage in winning new clients. Teladoc's international presence could even enable Livongo to gain traction outside of the U.S.
I believe that the sell-off of Teladoc presents a tremendous opportunity to buy a great healthcare stock at a discount. Investors will be better off if they focus on the long term rather than the short term. And the long term for Teladoc looks more promising now than ever.