Investors have anticipated a painful earnings season because of the COVID-19 pandemic. To see things turn out better than expected, therefore, has given the stock market a shot in the arm. Markets got a further lift on Wednesday morning, especially with Walt Disney (NYSE: DIS) giving investors a positive surprise. Just before 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES: ^DJI) was up 284 points to 27,112. The S&P 500 (SNPINDEX: ^GSPC) rose 20 points to 3,326, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) gained 29 points to 10,971.
One company whose earnings report seemed to go unnoticed was Livongo Health (NASDAQ: LVGO). The diabetes glucose monitoring specialist announced another set of blockbuster results, but the news got overshadowed by an announcement that the high-growth healthcare stock had agreed to an acquisition by Teladoc Health (NYSE: TDOC). Both Livongo and Teladoc moved sharply lower in response as, at least in the short run, traders voiced their discontent with the strategic combination.
Livongo's fundamentals are stronger than ever
For investors who just looked at Livongo's second-quarter financial report, things looked great. The company continued its string of impressive performances, pointing to the sound fundamental business prospects for the provider of remote monitoring services for diabetes patients.
Livongo's revenue jumped 125% from where it was 12 months ago, as a surge of new patients joined the service. Livongo now counts more than 410,000 members using its glucose monitoring, up 113% year over year. The company posted a minimal loss, and after adjusting for extraordinary items, Livongo said its adjusted earnings came in at $0.11 per share.
CEO Zane Burke's comments were positive. The leader pointed to the 75% rise in employers and health plan clients using Livongo, as virtual care becomes more commonplace, accepted, and necessary in the current healthcare environment. Moreover, Burke sees further opportunities for growth in expanding its already impressive leadership position.
What the deal means for Livongo and Teladoc
Yet the bigger news proved to be Teladoc's purchase of Livongo. Under the terms of the agreement, Livongo shareholders will receive 0.592 shares of Teladoc stock plus $11.33 in cash for every share of Livongo stock they own. Based on Teladoc's closing price on Tuesday, that worked out to around $159 per share in total compensation. That's roughly a 10% premium over where Livongo closed Tuesday afternoon.
Yet as often happens with acquisitions with a significant stock component, Teladoc shares dropped significantly. At its worst levels, Teladoc was down 20%, and closer to 11 a.m. EDT, the stock was still off 15%. That left the implied value of the deal closer to $135 per Livongo share. That's roughly where that stock traded Wednesday morning, down 7% after having been off twice that.
Some Livongo shareholders have to be disappointed at the fact that the deal will force them to accept slower overall growth rates from the combined company. Teladoc has grown at a healthy rate, and the prospects for its remote medical services getting a further boost are considerable. But the revenue growth can't match Livongo's pace. Some would inevitably prefer to keep Livongo separate and benefit solely from the expansion of its business.
For long-term investors, the question is whether Teladoc will help foster Livongo's success or simply subsume it into a slower-growing whole. Given just how sharply both stocks have risen in 2020, it's anyone's guess whether the healthcare businesses will be able to sustain their growth in a way that keeps both momentum traders and dedicated shareholders satisfied.
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Dan Caplinger owns shares of Walt Disney. The Motley Fool owns shares of and recommends Livongo Health Inc, Teladoc Health, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.