Livongo Health IPO: Funded By Merck And May Not Be Expensive At 10x Sales - Livongo Health (Pending:LVGO)

Livongo Health, Inc. uses artificial intelligence and data science to improve the quality of life of patients suffering from chronic diseases.

Livongo Health obtains information in real-time from all its clients and through various health monitoring devices. The data collected is aggregated and interpreted by proprietary algorithms, which propose actionable insights.

Journals like Journal of Diabetes, the Journal of Medical Economics, and the Journal of Medical Internet Research published reports on Livongo's technology.

With annual revenue of $68 million and revenue growth of 121%, let's assume forward revenue of $150 million, which gives an EV/Forward Revenue of 10x.

It is beneficial that the company will not use the money to pay the debt or give money to existing shareholders.

Artificial intelligence company Livongo Health (LVGO) expects to sell shares at 10x forward revenue in its new IPO. With 121% revenue growth, the valuation is not expensive. Other companies that apply artificial intelligence in their businesses trade at 17x forward sales. With that, there are several risks. The company reports a significant amount of intangible assets, which may get impaired in the future. Additionally, Livongo Health has a limited operating history. The number of clients increased a lot in 2018 but may not increase that much in the future.

Founded in 2008, Livongo Health, Inc. uses artificial intelligence and data science to improve the quality of life of patients suffering from chronic diseases.

As shown in the image below, the company has been successful in treating diabetes, hypertension, and dyslipidemia among other illnesses.

Livongo Health obtains information in real-time from all its clients and through various health monitoring devices. The data collected is aggregated and interpreted by proprietary algorithms, which propose actionable insights. For instance, patients who have diabetes receive a call or a text message when their blood sugar goes too high or too low. See below some of the devices that members use:

Read the lines below for further details on how the system works:

Readers who don't believe in the power of AI applied to medicine should read the lines below. It is a publication about the company's technology that appeared in the Journal of Diabetes. In a sample of 276 individuals suffering from diabetes and hypertension, 81% of patients using the company's program reported a reduction in their blood pressure.

As shown below, other journals, like The Journal of Medical Economics and the Journal of Medical Internet Research, published reports on Livongo's technology.

Besides, large organizations and health providers offer the company's devices. See the image below for more information on Livongo's clients:

The key metrics reported are impressive. As of March 31, 2019, the company had 679 clients, 144% more than that in 2018. Also, the number of enrolled diabetes members increased in the same period by 139%, reaching to 164,168 members. The table below offers further details on the matter:

The market opportunity is massive. Let's understand the market size of treatments for diabetes. The company believes that the immediately addressable market size for employees of self- and fully-insured organizations in the U.S. approximates to $12.3 billion.

With that, the global opportunity could be much more significant. As shown in the image below, as of April 1, 2019, 425 million patients were living with diabetes. Besides, by 2045, the amount of patients is expected to increase by 48%. Assuming that Livongo's plan without insurance costs $49.99 per month, the global market opportunity could exceed $21 billion.

The revenue growth reported is impressive. In the year ended December 31, 2018, the company reported revenue of $68 million, 121% more than that in 2017. The gross profit margin is also significant. Gross profit margin approximated to 70% and 73% in 2018 and 2017 respectively.

Livongo Health does not report positive net income or Adjusted EBITDA. Growth investors usually care about revenue growth and gross profit margin. However, in this case, they need to review the net losses, which are not small. In 2018 and 2017, net losses approximated to 50% of the total amount of revenue and are not declining. It is not ideal. The image below offers further details on the matter:

With an asset/liability ratio of 4x and $54 million in cash, the company's financial situation seems solid. With that, several intangible assets pose impairment risks. Market participants need to know about them.

Goodwill and intangible assets represent 29% of the total amount of assets. Accountants have many times problems while assessing the valuation of intangible assets. Also, they may decide to reduce the valuation in the future, which may lead to share price depreciation. See the image below for more information on Livongo's assets:

Let's assess the acquisitions executed by Livongo and the assets acquired. It will help understand the amount of goodwill registered and the types of businesses acquired.

In February 2019, Livongo Health acquired myStrength, Inc. which was founded in 2010. The acquired company offers a platform that uses sophisticated machine learning algorithms for cognitive behavioral therapy. MyStrength can help patients deal with several conditions, including anxiety, insomnia, stress, and chronic pain among others. The image below offers further information on myStrength's software:

Livongo Health, Inc. paid $33.5 million including goodwill of $20 million, developed technology of $9.2 million, and trade name of $0.4 million. The image below offers further information on the matter:

According to Crunchbase, MyStrength, Inc. received total funding of $5.9 million in 2017. Livongo Health, Inc. acquired the company for $33.5 million. Shareholders made an impressive rate of return. The image below offers further details on the funding rounds organized by myStrength in 2017:

With the amount paid for myStrength in mind, market participants need to understand that the risk of the acquisition is not small. The amount of intangibles and goodwill is significant. If myStrength does not obtain a considerable amount of revenue in the future, accountants may need to reduce the goodwill.

The acquisition of Retrofit in 2018 also included a significant amount of goodwill. The purchase consideration approximated to $18 million with the goodwill of $13 million and intangible assets of $5.5 million. The image below offers further information on the matter:

The number of liabilities is not worrying. As of March 31, 2019, the company reports total liabilities of only $45 million with accrued expenses of $22 million and advance payment from partners of $6 million. It is worth mentioning that the company reports no long-term debt, which is quite ideal. See below for further details on Livongo's liabilities and contractual obligations:

As shown in the table below, Livongo Health sold a significant amount of redeemable convertible preferred stock, which most market participants will not appreciate. With this in mind, it is good noting that Livongo Health expects to convert these securities as the IPO goes live.

Livongo Health, Inc. expects to have $263 million after the IPO. With 88.9 million shares at $21.50 per share, the expected market capitalization will be $1.911 million. Deducting cash of $263 million, Livongo Health would have an enterprise value of $1.648 million. See the image below for further details on the expected capitalization:

With annual revenue of $68 million and revenue growth of 121%, let's assume forward revenue of $150 million, which gives an EV/Forward Revenue of 10x.

The following companies compete with Livongo. It is a pity that they are not public companies. They don't serve for assessing the valuation of Livongo. The company cited them in the prospectus:

There are not companies that make use of AI alone, which is not ideal. See below a list of organizations that are currently investing heavily in AI. Notice that none of them operates in the medical sector. Many of them work in the technological industry or the financial industry. They trade at 6.7-17x sales, so Livongo Health is not that expensive at 10x. Besides, they are not growing at a more significant rate than Livongo Health. Their revenue growth is between 12% and 54%. Livongo Health reports revenue growth of more than 121%. With this in mind, the company could easily trade at more than 17x forward revenue.

Livongo Health, Inc. does not mention a lot about the use of proceeds from the IPO. The company expects to use the money for general corporate purposes, operating expenses, and capital expenditures among other purposes. From here, it appears that the company gave boilerplate text. Read the lines below for further details on the matter:

With that, it is beneficial that the company will not use the money to pay the debt or give money to existing shareholders.

Shareholders are not expected to sell shares in the IPO. Executive directors will reduce their stakes from 15% to 13.3%, and institutional investors will also reduce their stakes. However, the total amount of shares owned by all investors will be the same after the IPO. It could be good that investors acquire new shares in the IPO. With that, it is ideal that they are not selling shares.

The image below offers further details on the matter. Notice that Merck (MRK) is among the shareholders:

With impressive revenue growth and large market size, Livongo Health will most likely trade at more than 10x forward sales after the IPO. Having said this, there are several risks. The company has acquired several companies and reports a large amount of goodwill. If accountants decide to impair the company's intangible assets, the share price may decline.

Additionally, Livongo Health has a limited operating history. The revenue grew in the past at a high pace, which does not mean that it will also grow in the future. Growth investors will dump the stock if revenue does not surprise in 2020 and 2021. For instance, with revenue growth of 50% y/y, the company may trade at 4-7x forward sales. The value erosion could be substantial.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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