There's little question that the best path to wealth generation is investing in quality stocks and holding them for years and even decades. Along the way, there is the potential to find a company that can become a "multi-bagger," or an investment that gains several times its original value. There are a few contributing factors that can help a stock go parabolic, increasing the chances that it will become one of this rare breed of investment.
Find companies that provide a novel answer to an age-old problem, have massive secular tailwinds, or have a large addressable market, and you'll be on the right track. In very rare instances, you can a find a company that ticks all three of those boxes, dramatically increasing the likelihood of multiplying your investment dollars many-fold. An investment in any or all of these companies will likely fit the bill.
Teladoc and Livongo: A powerful one-two punch
Teladoc Health (NYSE:TDOC) was already in an enviable position before the onset of coronavirus. Patients were gravitating toward the ease of virtual care offered by app-based doctor visits, without the need for a trip to the clinic. With the arrival of the pandemic and the resulting stay-at-home orders, the company was perfectly positioned to give patients a safe and convenient alternative.
As a result, the number of virtual office visits surged higher, driving Teladoc's financial performance in its wake. The numbers so far this year tell the tale. In the first quarter, Teladoc's total patient visits jumped 92%, sending revenue growth up by 41%. Things really took off in the second quarter, with total patient visits that increased 203%, pushing revenue up 85%.
Livongo Health (NASDAQ:LVGO) was also riding high, providing a novel solution to patients and healthcare providers alike. The company's offerings help patients manage chronic conditions between regularly scheduled checkups with their physicians. Estimates vary, but there are as many as 147 million Americans with at least one chronic condition, according to Livongo's management. This can include a variety of issues, such as diabetes, hypertension, weight management, diabetes prevention, and behavioral health.
Through the use of connected devices, Livongo provides ongoing and timely feedback to help patients manage their condition, thus improving their quality of life while also lowering the cost of their healthcare, resulting in one of those rare cases that is truly a win-win.
The Livongo for Diabetes program was the one that started it all. It reported enrollment that grew 113% year over year in the second quarter, propelling revenue 125% higher year over year. The company was already producing stellar results, with first-quarter enrollment growth of 100% and revenue that soared 115%.
The companies announced in early August that Teladoc Health and Livongo Health would be joining forces, creating "the only consumer centered virtual care platform for full spectrum of health needs to address accelerating consumer and client demand."
Investors were initially dubious about the combination, sending both stocks down 14% in the wake of the announcement. After investors digested the news, however, the stocks resumed their upward trajectory.
Add in a massive addressable market, and Teladoc and Livongo indeed check all three boxes. Teladoc Health estimates its total addressable market at $30 billion. Livongo Health's management believes the market for diabetes management alone comes in at $16 billion, while the solutions for the other chronic conditions it addresses represent an additional opportunity of $18 billion. This puts the combined addressable market for these companies at a whopping $64 billion. To understand the magnitude of the opportunity, consider this: The combined revenue of the two companies totaled $724 million last year, showing they've just scratched the surface of their respective addressable markets.
As social distancing took hold as a result of the pandemic, the time-honored tradition of signing agreements in person was exposed for the outdated practice it is. DocuSign (NASDAQ:DOCU) was already the undisputed leader in the electronic signature space, controlling an estimated 70% of the market. But as businesses sought ways to consummate agreements at a distance, DocuSign was the most obvious choice.
Expanding beyond the simple signature, the company has also developed a cloud-based suite of applications to automate the entire lifecycle of the agreement process, dubbed the DocuSign Agreement Cloud. The platform provides businesses with all the tools they need to prepare, sign, act on, and manage their agreements. This can be something as simple as an offer letter originating in the human resources department, or more complicated, like multi-page sales contracts between buyer and seller. It also integrates with a host of existing applications from salesforce.com and Microsoft, among others, allowing uses to create signature-ready contracts with a few keystrokes.
DocuSign's revenue grew by 45% in the second quarter, accelerating from the 39% gains in Q1. More importantly, nearly 95% of its revenue came from subscriptions, providing a solid base of recurring revenue that will only grow from here. At the same time, its billings grew 61% year over year, while its adjusted profits soared 17-fold.
The company's addressable market fills out the trifecta of factors that could help feed this future multi-bagger. DocuSign estimates that the market opportunity for digital signatures alone comes in at $25 billion. The addition of the Agreement Cloud effectively doubles its total addressable market to $50 billion. DocuSign's total revenue of $974 million last year is a drop in the bucket compared to the opportunity that remains.
The fine print
There's a trade-off that comes from investing in these potential multi-baggers, as each of these companies is a high-risk, high-reward stock, which comes with an equally high price tag similar to many other high-growth companies. Teladoc, DocuSign, and Livongo are selling at 19 times, 30 times, and 40 times forward sales, respectively, when a reasonable price-to-sales ratio is generally between one and two. Additionally, these companies have yet to generate a profit as they scramble to gain market share.
Investors have thus far been willing to pay up for the impressive top-line growth and the enormous long-term potential of each of these high-flyers. Considering their impressive growth rates, they don't seem nearly as expensive.
It also isn't a stretch to think they will be multi-baggers three to five years down the road -- since they've already achieved as much already this year.