Sell-Side Mixed On Surging Livongo Health

Livongo Health Inc LVGO shares have bumped up more than 30% since the company went public at the end of July, raising interest in the digital health platform company. But analysts’ opinions were mixed as two firms started coverage on Monday.

The Analysts

KeyBanc Capital Market's Donald Hooker initiated coverage of Livongo Health with an Overweight rating and $46 price target.

Morgan Stanley’s Ricky Goldwasser opened coverage at Equal-weight with a $42 target price.

The Takeaways

Livongo uses technology to manage chronic disease treatment, mostly in patients with diabetes, and both analysts said the company’s business model appear to give it a long growth runway.

KeyBanc’s Hooker said revenue growth of 70%-plus and 60%-plus in 2020 and 2021 look likely, while the company consistently generates high gross margins and economies of scale.

While Livongo is spreading out beyond diabetes treatment, that core disease gives the company much of its potential, the analyst said, noting diabetes affects more than 23 million Americans.

“LVGO is set up for an acceleration of growth having more than doubled its new business bookings in 2018 (year over year) and quadrupled its bookings in 1Q19 (y/y),” Hooker said in a Monday initiation note. 

The subscription-based model is interesting, he said, estimating that Livongo has 500,000 potential new subscribing members for its digital diabetes service.

The company also has five new health plan channel partnerships, which adds more potential users, the analyst said. 

Early In Model

Morgan Stanley’s Goldwasser is also impressed with Livongo’s subscription-based revenue model, stickiness with clients and the overall growth potential in the industry.

Aside from that, she also noted Livongo is early in a new and largely underpenetrated market.

“Considering the high stickiness associated with employer benefit contracts (industry standard 95% to 97% renewal rates) a first-mover advantage is a critical success factor benefiting Livongo,” the analyst said. 

Yet much of the growth potential may have already been priced into the stock, she said in a Monday initiation note.

p>Livongo has shown 31% price growth since the IPO, while the market was down nearly 4% at the same time and the compare sector down 8.5%, keeping Morgan Stanley from a more bullish rating, Goldwasser said. 

Also worth considering is that after more than 120% annual revenue growth in 2018 and 2019, investors will wonder what the sustainable growth profile is for the company, the analyst said. 

"We believe tech investors would think the revenue deceleration (we model 66% growth in 2020 and 64% growth in 2021) is too steep, while healthcare investors are likely to be more comfortable with this deceleration."

Price Action

Livongo shares were higher by 0.57% at $37 at the time of publication Monday. 

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Photo courtesy of Livongo.