Here are our key takeaways from the business analysis of Teladoc:
- Teladoc reported 9.6 losses as impairment due to the Livongo acquisition. But it is noncash, an ‘unreal’ loss, and just an assumption.
- Teladoc stock price falls more than 90% from its all-time high at 292 levels (July 2021) to 32 (August 2022). With its advantage as a prime mover, many investors assume that Teladoc is an opportunity.
- We beg to differ. The problem of Teladoc is in its underlying business, not Livongo. Livongo is okay, but the acquisition of Livongo can’t help Teladoc cope with the main problem.
Lets elaborate.
Yoo, spoiler alert: without Livongo, Teladoc is not special. So let’s talk about Livongo.
The Logic: Good Company in Temporary Trouble is an Opportunity, said Warren Buffett:
The goodwill impairment is temporary trouble and Teladoc is a good company. Lets us check the reality in the business analysis of Teladoc.
The company writes the goodwill impairment when the acquisition exceeds the ‘fair’ value. The best example is when Microsoft recorded a monumental $7.6 billion goodwill impairment for Nokia in 2015. So, the impairment is: you just buy the company too expensive. You lose nothing, it is just an adjustment.
Well…true.
But even when it is just an assumption or adjustment, the large number of goodwill impairments shows the incompetence of management. Microsft with Steve Balmer shows that. Also Teladoc with Jason Gorevic.
Then Balmer left the show, and give the helmet to Satya Nadella. Since then, Microsoft navigating from Windows to Azure, bring life and growth to the company. Teladoc will follow? Not so fast, Sherlock.
The Prime Mover Advantage: The Large Inertia to Build Network Effect and Switching Cost
Teladoc is one of the first players in telemedicine. It should enjoy the first mover advantage since it collects data from people and locks them in its environment. Why move to another telemedicine vendor if we get good service with Teladoc? Especially, why people share their health and medical data with other vendors – it is sensitive and sometimes embarrassing.
So, the impairment loss is just a temporal problem.
We think that in industries like medical care, the digital has no power. A real care provider like a hospital could deliver the same services through zoom or video chat. It is not that difficult to duplicate these services. Also, in the medical world, physical meetings with patients are more significant than just a conversation on your iPad.
Digitalizing the business is not a durable competitive advantage.
Netflix competitors, like Amazon prime video and Disney+, could replicate Netflix streaming services. Also with their unique library.
Making the delivery services through apps is easy to replicate. We discussed it in a post about Airbnb.
Selling expensive bikes and making a community through a digital platform is also not a competitive advantage, we covered it in the Peloton issue.
We write it again.
Digitalizing the business is not a durable competitive advantage. The competition will eat the margin due to the lack of barriers for new entrants.
Livongo impairment is a temporal problem, but the Teladoc itself is long-term trouble.
What Happened?
Livongo is one of the most promising companies in the telehealth sector. Why did Teladoc write it as a loss? Did Teladoc buy it too pricey? The business analysis of Teladoc should examine the case of Livongo.
Back to 2020, the year when the pandemic ruled the earth…
In October 2020, Teladoc completed the $18.5 billion acquisition of Livongo in just 3 months. It was a quick – really quick move from a New York-based service provider. And it looked good, a telemedicine company captured the more segmented, more promising, more rapid – but smaller company. A virtual care provider with a massive network joins the strength with virtual treatment and data providers of diabetes and chronic disease.
It looks like Google get Youtube, a search engine that captures the video platform where people search specifically for video.
But unlike Google, it turns out to be a mess.
A 9.6 billion loss as goodwill impairment losses.
What’s wrong?
Well, in the medical world, sharing data is not that easy. Google could integrate our search in its search bar into Youtube recommendations through its AI. Teladoc can’t. The first reason is it has no expertise in AI, but it could be overcome. The main problem s that the medical data or record is sensitive. Most customers of Livongo may reluctantly share their data with Teladoc.
The Bigger Picture:
The Role of Livongo
So we have the hypothesis that Teladoc has no business edge against rivals and the competition will eat up the margin and market share. This brings us to the bigger picture. This is why Teladoc needs Livongo. Livongo provides a source of growth.
If the data integration is successful, Teladoc could become the telemedicine platform that covers primary care as well as chronic care. The New York-based provider could bundle the service into one fee that covers all customer needs. The impairment shows us that the promise is not as good as the reality. We will wait for how Teladoc executes its Livongo asset, but at the moment, we would like to stay away from this unproven and unprofitable company.