A rolling telehealth cart from Teladoc allows doctors to meet their patients remotely, on October 8, 2021.
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This week’s earnings details included some of the big name accounts with the value of high-growth, high-tech, and high-risk companies. Ford and Amazon write stakes in electric car maker Rivian; Alphabet and Microsoft indicated some of the stock’s depreciating bets. But the valuation hit was the biggest, and in a miniature way of its own, it might speak loudly about the past decade’s valuation gains in tech startups that have been offset by the dot-com bubble, coming from the healthcare sector.
Healthcare was a marquee business in the pandemic market. This might sound obvious: a world dealing with a global medical crisis bringing economies to a standstill must awaken the need for more investment in health care. There have been big winners whose business has been directly linked to the pandemic threat, and their investors have proven the value of their spin: Moderna Therapeutics. But on a broader stock market level, digital health trading has been in the home equity class that has made huge gains, with telehealth booming, with patients demanding care virtually and with digital services being adopted across sectors. Years of development in a period of months.
The topic now looks thin, and these business models plan to use to turn pandemic plays into less-certain long-term health-care winners. A lot of technology has been hit since last fall, from enterprise cloud to biotech and fintech, but this week’s disastrous earnings from telehealth leader Teladoc hit the bottom line for the healthcare version of the recent tech bubble trade. After booking more than $6 billion in fees related to its acquisition of chronic care company Livongo, Teladoc shares have collapsed and are now down more than 80% from a year ago. Its plunge of 40% on Thursday significantly mitigated what had been a year-long train wreck for public digital health assessments: Rivals AmWell and 1Life Healthcare are down more than 80% in the past year, and consumer healthcare company Him and Hers Health is down more than 60%.
Among the investors in AmWell was Google, which invested $100 million in the company in 2020.
The $6.6 billion impairment charge has been left out of the earnings metrics, but it’s a huge blow directly related to how Teladoc plans to make its home business bridge to the post-pandemic business. Teladoc bought Livongo for $18.5 billion in cash and stock in late 2020 in its largest digital health deal to date.
Consider how bad the $6.6 billion impairment charge can be: After shares plunged Thursday, it was greater than Teladoc’s market capitalization.
CNBC’s Bob Pisani points to an ominous parallel market: AOL-Time Warner. Within a year of that deal, the headlines for the combined company were not about synergies but about “poor goodwill” as the value of the original dotcom bubble deal, AOL, fell sharply.
The cuts in AOL-Time Warner were Teladoc-sized multiples (before and after the crash). But the collateral damage from the Teladoc debacle spans across the recent turbulent investing era and one notable equity producer: ARK Invest’s Cathy Wood, which was among the only funds to invest in Teladoc’s “falling knife” earlier this year, has grown into the largest shareholder. In which. It was the third largest holding in its biggest fund after Tesla and another home play: Zoom Video Communications.
Wood’s fund was not deterred, buying more Teladoc on Thursday, and the stock had rebounded slightly on Friday morning even as other tech stocks continued to sell off. But in a sign of how much disruptive trading has come about, its flagship ARK innovation fund has now suffered a fate familiar to the vast majority of its investment management peers, even those off to a hot start: It’s no longer the case before the S&P 500 index has performed since Create it. For any investor who lived in the dot-com bubble and was old, or parents old enough, to be sold on the need to branch out from seed capital to sector fund bets in health sciences, telecoms and tech funds, the lessons should have been learned. For a long time.
The biggest issue for Teladoc is not just whether she, Livongo and others have entered a period of reassessment before moving to a higher level again, but whether cracks in the foundation of its business model have been revealed as pandemic euphoria erodes. Wall Street, which released the stock exchange Thursday morning, is concerned, with one analyst writing of “gaps in TDOC’s entire healthy foundation as increased competitive intensity weighs on growth and margins.”
Wall Street notes that these cracks are only occurring in areas where Tilladock was planning to expand beyond a commodity-based, basic telehealth service, to direct-to-consumer mental health and the chronic care space in Livongo, projected growth drivers for the next three years.
“While we are reticent to make sweeping changes to our thesis based on a poor quarter, we doubt we’ll see competition-driven headwinds any time soon,” wrote one analyst who downgraded the stock.
Employers’ focus on wellness has been a tailwind for this sector, but there is now growing uncertainty about how much corporate buyers will pay for these services. Sales cycles are pushed out and employers who pay very high wages and deal with manpower shortages are reassessing their expenses. “HR departments are under pressure because there is so much going on in terms of returning to the position, dealing with the great resignation and all of the hiring and allocating resources to acquiring and retaining talent,” Teladoc CEO Jason Gurevich said.
This week’s Rivian share cutbacks speak to what sounded logical enough in bubble talk after investors piled into EV shares. Valuation gains often reflect one component of what makes a bubble: an imbalance between supply of a particular investment desire and demand, and market bubbles form when too much money is put to work in a particular area that is in short supply. Rivian was one of the only public market options to bet on EVs other than Tesla.
But in digital healthcare, it’s players, not just commerce, that are getting crowded, a point Teladoc hinted at in its earnings. “We are seeing customers overwhelmed with a number of new micro-dot solutions, which have created quite a buzz in the market,” Gurevich said.
That’s why companies like Teladoc are actively seeking expansion, and across services, in mergers and acquisitions like the Livongo deal. Castlight Health has merged with Vera Whole Health. Virgin Pulse has been linked with Welltok. Accolade purchased PlushCare. Major tours and doctors on demand are integrated. They also face the brutal threat of Amazon, which this year began rolling out its health services to corporate plans nationwide. Connecting high-value digital health firms may have led valuations well ahead of evidence that deals will work in a market under pressure from all sides.
The latest comparison is not the dotcom bubble. The Nasdaq is experiencing its worst month since the collapse of the pandemic in March 2020. Amazon suffered its biggest drop in eight years on Friday.
“The current market performance threatens to go from a long and painful ‘correction’ to something more worrying,” according to a note from Michael Shaul, Head of Asset Management at Marketfield, cited by CNBC. “What tends to be more important than lower prices, is the length of time it takes to fix a deep pullback.”
Amazon’s drop of more than 10% on Friday isn’t something in the bigger picture of the trillion-dollar company as it has become. But in an earlier era, it took Amazon a decade to recover in the stock price after the internet bubble burst.
It might just be getting to the bottom of the pandemic trade bubble, or something deeper – the Nasdaq is going for its worst month not just since March 2020 but since 2008, and the worst start to a year ever, worse than 2001 and 2002, According to Bespoke.
In an interview with CNBC on Friday afternoon, Kathy Wood compared Tilladock directly to Amazon, saying they are in “the same union” and arguing that investors lose out.
Gurevich told Wall Street analysts he’s convinced Teladoc’s “overarching” strategy is the right one, it may take longer to see the pipeline turn into sales, and more deals may come through insurance partners rather than buying companies outright. Teladoc is undoubtedly a leader in its market.
But the Teladoc CEO also admitted that “it’s still kind of on the verge of finalizing the merger, and we don’t have the proof-of-concept behind it. So people are waiting and eager to see them and early adopters buy, but we hope it hasn’t hit the bulk of the market yet.”
Or in other words, the test results from the lab have not yet returned. Investors, unlike patients, do not need to wait.
–CNBC’s Ari Levy contributed to this report.