The market just released an unhealthy AOL-Time Warner bubble comparison

The market just released an unhealthy AOL-Time Warner bubble comparison

The market just released an unhealthy AOL-Time Warner bubble comparison

A Teladoc rolling telehealth cart that allows doctors to meet with their patients remotely, October 8, 2021.

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Earnings details this week included big-name calculations with the value of high-growth, high-tech and high-risk companies. Ford and Amazon note their stakes in electric vehicle manufacturer Rivian; Alphabet and Microsoft noting some bets on stocks that have lost value. But the valuation hit that has been the biggest, and in its own microcosmic way, may speak the loudest of the last decade of valuation gains in tech start-ups that have drawn comparisons to the dotcom bubble, comes from the sector health care.

Healthcare was a flagship business in the pandemic market. It may seem obvious: a world facing a global medical crisis crippling economies should wake up to the need to invest more in healthcare. There have been big winners whose business was directly linked to pandemic risk and whose investors have proven the value of their foresight: namely Moderna Therapeutics. But at a broader stock market level, digital health trading fell into the home-equity category that saw huge gains as telehealth boomed, with patients forced to seek treatment virtually and the adoption of digital services across all sectors has continued. years of evolution in a few months.

That theme now seems tenuous, and the business models these disruptors plan to use to turn pandemic gaming into long-term healthcare winners are less certain. Much of the technology has been battered since last fall, from enterprise cloud to biotech and fintech, but telehealth leader Teladoc’s disastrous earnings this week marked the lowest point. for the health version of this recent tech bubble. After taking a charge of more than $6 billion related to its acquisition of chronic care company Livongo, Teladoc shares cratered and are now down more than 80% from a year ago. Its 40% drop on Thursday highlighted what has been a year-long sinking for public digital health valuations: Competitors AmWell and 1Life Healthcare have fallen more than 80% in the past year, and consumer healthcare company Him and Hers Health fell more than 60%.

Among AmWell’s investors was Google, which invested $100 million in the company in 2020.

The $6.6 billion impairment charge is excluded from earnings measures, but it’s a big hit that directly relates to how Teladoc planned to build its home-based business into a bridge to a business. post-pandemic. Teladoc bought Livongo for $18.5 billion in cash and stock at the end of 2020 in the biggest digital health deal to date.

To put into perspective how serious the $6.6 billion impairment charge is: After Thursday’s stock decline, it was larger than Teladoc’s market capitalization.

CNBC’s Bob Pisani pointed to a disturbing market parallel: AOL-Time Warner. Less than a year after that deal, the headlines for the combined company weren’t about synergies but about “goodwill impairments,” the value of the initial stage of the dot-com deal, AOL, having dropped.

AOL-Time Warner’s writedowns were orders of magnitude the size of Teladoc (before and after its crash). But the collateral damage from the Teladoc disaster extends to the recent era of disruptive investing and one of its star stock pickers: ARK Invest’s Cathie Wood, which was among the only funds to invest in the “falling knife” of Teladoc earlier this year, and had become its largest shareholder. It was the third-largest holding from its largest fund after Tesla and another home game: Zoom Video Communications.

Wood’s fund is undeterred, buying more Teladoc on Thursday, and the stock rebounded slightly Friday morning even as other tech stocks continued to sell off. But in a sign of the scale of the fallout from the disruptive trading theme, its flagship innovation fund ARK has now suffered a fate familiar to the vast majority of investment management peers, even those starting out on the right foot: it doesn’t. is more ahead of the S&P 500 in terms of performance since its inception. For any investor who has been through the dotcom bubble and is old enough, or whose parents are old enough, to be convinced of the need to move from core equity to sector fund bets on health science funds, telecommunications and technology, the lessons should have been learned long ago.

The big issue for Teladoc is not just whether Livongo and others are simply in a period of resetting valuations before rising again, but whether cracks in the underpinnings of its business model have been revealed as the pandemic euphoria is eroding. Wall Street, which bailed out the stock on Thursday morning, worries, with one analyst writing about “cracks across TDOC’s healthcare base as heightened competitive intensity weighs on growth and margins.”

And Wall Street notes that these cracks occur only in areas where Teladoc planned to expand beyond the basic standardized telehealth service, into direct-to-consumer mental health and Livongo’s chronic care space, drivers of growth. expected for the next three years.

“While we are reluctant to make sweeping changes to our thesis based on a poor quarter, we doubt we will see competitive headwinds ease anytime soon,” wrote an analyst who downgraded the report. title.

Employers’ focus on well-being was seen as a tailwind for this sector, but there are now growing doubts about how much business buyers will pay for these services. Sales cycles are pushed back and employers paying very high wages and facing labor shortages are reassessing their spending. “HR departments are in a rush because there is so much going on in terms of getting back to the office, dealing with the big resignation, and all the hiring and allocation resources for acquisition and retention. talent,” said Jason Gorevic, CEO of Teladoc.

The writedowns of Rivian’s holdings this week testify to what seemed quite logical in the bubble talk after investors piled into the electric vehicle stock. Valuation gains often reflect an element of what makes a bubble: an imbalance between the 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 lacks supply. Rivian was one of the only public market options to bet on electric vehicles other than Tesla.

But in digital healthcare, it’s players and not just commerce that have been encumbered, a point Teladoc alluded to in its earnings. “We’re seeing customers inundated with a number of new, smaller point solutions, which has created noise in the market,” Gorevic said.

That’s why companies like Teladoc were actively looking to grow, and through services, in mergers and acquisitions like the Livongo deal. Castlight Health merged with Vera Whole Health. Virgin Pulse has partnered with Welltok. Accolade purchased PlushCare. Grand Rounds and Doctors on Demand have merged. They also face the monstrous threat from Amazon, which this year began rolling out its health service in corporate plans nationwide. The highly-valued digital health companies teaming up may have led to valuations well ahead of evidence that the deals will work in a market under pressure from all sides.

The most recent comparison is not the dotcom bubble. The Nasdaq is having its worst month since the pandemic crash of March 2020. Amazon recorded its biggest fall in eight years on Friday.

“The current market performance threatens to move from a long and painful ‘correction’ to something more troubling,” according to a note from Marketfield Asset Management President Michael Shaul, quoted by CNBC. “What tends to be more important than the price drop is how long it takes to repair a deep drop.”

Amazon’s fall of more than 10% on Friday is nothing in the big picture of the trillion-dollar company it has become. But in earlier times, it took Amazon a full decade to recover the stock price after the dotcom bubble burst.

Gorevic told Wall Street analysts he was confident Teladoc’s “whole person” strategy was the right one, and that it could take longer to see the pipeline turn into sales, and more deals could through insurance partners rather than direct corporate purchases. Teladoc is undoubtedly a leader in its market.

But the CEO of Teladoc also conceded, “It’s still kind of close to being done with the integration, we don’t have the evidence behind it. So people are waiting and looking forward to seeing and early users are buying, but we haven’t hit the bulk of the market yet.”

Or in other words, the test results haven’t come back from the lab yet. Investors, unlike patients, don’t have to wait.

CNBC’s Ari Levy contributed to this report.

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