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Teladoc and Livongo Demolished Expectations. So Why Are Their Stocks Down?

Two of the most high-profile healthcare stocks of 2020, Teladoc Health (NYSE: TDOC) and Livongo Health (NASDAQ: LVGO), reported third-quarter earnings after the market close last Wednesday. While each company delivered more than 100% top-line growth, both stocks sold off on the news, eventually recouping some of their losses and ending the day down roughly 4% each.

Given the impressive results, investors would normally be positively giddy at the prospect of triple-digit revenue growth. So what's going on with these two healthcare disrupters?

Image source: Getty Images.

Teladoc's rapid growth accelerated ...

Teladoc reported revenue of $289 million, up 109% year over year. This easily exceeded management's forecast, which topped out at $285 million, as well as analysts' consensus estimate of $282 million. This marked an acceleration from 41% revenue growth in Q1 and 85% in Q2.

Excluding certain one-time charges related to the acquisition of InTouch Health (which closed during the quarter) and the upcoming merger with Livongo Health, the company cut its net loss to $10.7 million, much improved from $20.3 million in the prior-year quarter. This resulted in an adjusted (non-GAAP) loss per share of $0.13, much better than the expected loss of $0.30. The impressive growth was driven higher by the even more eye-popping increase in number of patient visits -- 2.8 million, up 206%.

... as did Livongo's

Livongo Health also reported stellar results. Third-quarter revenue climbed to $106.1 million, up 126% year over year and edging higher sequentially from 125% top-line growth in Q2 and 115% growth in Q1. This easily topped analysts' consensus estimate of $95.6 million. The company generated adjusted net income of $19.2 million and adjusted earnings per share of $0.16, up from an adjusted loss of $0.05 in the prior-year quarter.

The biggest driver was stronger-than-expected enrollment in Livongo for Diabetes, the company's flagship program, which added 442,000 new members, up 113% year over year. Its total client base also swelled, up 71% to 1,402. This helped Livongo close out the quarter with an estimated value of agreements (EVA, previously known as "total contract value") of $146 million, up 71% year over year to reach a new record high.

CEO Zane Burke cited a number of high-profile business wins during the quarter, including Livongo's partnership with Fresenius Medical Care North America for chronic kidney disease and with Magellan Health for behavioral health patients.

Image source: Livongo Health.

So why were the stocks down?

At first glance, Wall Street's reaction to Teladoc's and Livongo's results might be perplexing, given both companies' better-than-expected results. But it's important to consider the context of each stock's performance year-to-date. Teladoc had already climbed 171% so far in 2020, while Livongo stock had soared 480% leading up to their respective earnings reports, even as the S&P 500 was essentially flat.

Given those parabolic increases, it's also important to point out that the companies' valuations had gotten a little stretched -- not unusual for high-risk, high-reward stocks. Just prior to earnings, Teladoc and Livongo were priced at 20 times and 51 times sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2.

Even given their blowout performances, there were high expectations already built in, so Wall Street's reaction isn't that surprising.

Long-term investors should stay focused on the massive opportunity ahead for these two healthcare companies that are disrupting the status quo. Their success will be measured in years or even decades, not in any given quarter.

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Danny Vena owns shares of Livongo Health Inc and Teladoc Health. The Motley Fool owns shares of and recommends Livongo Health Inc and Teladoc Health. The Motley Fool has a disclosure policy.


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