When telehealth provider Teladoc (TDOC -1.54%) purchased Livongo (LVGO) for $18.5 billion in August, the investing world was caught off guard. The valuation was considered outrageous by many, and shares of Teladoc fell 11% the day the deal was announced. A closer look should give investors at least one reason to expect tremendous growth ahead.
Completing the arsenal
Livongo offers remote monitoring and coaching -- powered by artificial intelligence -- for patients with chronic diseases. The company's specialty is helping those with diabetes improve quality of life, and reducing costs for patients and insurers. Livongo has been able to leverage this and turn in astounding growth. The company saw revenues of $170.2 million in 2019, up 149% from the year before. COVID has helped maintain the pace, as management reported 125% in the second quarter of 2020 compared to the same quarter last year.
The metric that trumps them all
One perspective critics of the deal may not appreciate is Livongo's stickiness with its users and how much that could be worth. Software companies use customer-lifetime value as a metric that tells them how much money the average customer will generate, comparing it to customer-acquisition costs, or how much money it costs to attract a new customer. This comparison gives investors a reliable sense of how profitable the business will be over the long term.
Unfortunately, companies don't just hand this information over to investors. However, a great indicator that customers will have a long lifetime, and a lot of value, is Net Promoter Score (NPS). If you've ever answered the "How Likely Are You to Recommend on a Scale from 0 to 10" question, you are familiar with the method. By subtracting the percent of people who answer zero to six -- detractors -- from the percent of people who answer nine or 10 -- promoters -- you arrive at the net promoters. The measure is a proven indicator of customer loyalty.
On this metric, Livongo scores a world-class +64. This compares favorably to Apple (AAPL -1.44%) at +47 and Amazon (AMZN -0.34%) at +25. This level of NPS, thus loyalty, is likely to lead to a significantly higher lifetime value for Livongo customers. As the company continues to grow with little churn, every new customer represents growth (rather than replacing customers who have stopped using the services). Perhaps this is why Teladoc was willing to pay such a premium for the shares. If this key metric holds, the market may be creating an opportunity for investors who don't ignore the most important metric in valuing the business long term.