Issue #30: A pure play in consumer internet security and the world leader in telemedicine 🚨
Alex Sacerdote is the founder and portfolio manager of Whale Rock Capital. In 2018, when Whale Rock had $1 billion under management, Sacerdote gave an interview. Three quotes stand out.
“Some stock picking can be trained or learned but there may be an innate aspect to it— an inherent savviness, contrarianism, and creativity in thinking. I view it as a willingness, if not a passion, to challenge the status quo or vehemently argue other viewpoints”
“You have to love learning and really get excited when you gain conviction in a theory.”
“We spend a lot of time collecting data, but much more important is developing insights from it and building it into our collective thinking.”
Does it work? As of Q2 2021, Whale Rock is sporting an annualized 43.82% yield over the last 3 years, with $24.7 billion under management.
Fundamentals are important, but they won’t give you an advantage, because everyone else has the same information. The advantage is in seeing the same information from a unique perspective.
Let's get into this week’s report. Today we’re looking at two fast-growing companies in booming tech sectors:
- A fast-growing leader in the Internet Security industry.
- The dominant player in remote medicine.
McAfee Corp. ($MCFE)
$26.39 - Share price at the time of writing
- McAfee is a leading provider of internet security solutions, offering a suite of antivirus, anti-malware, and privacy products.
- McAfee recently sold its enterprise business for $4 billion and is now focused entirely on consumer security products.
- The Company added over 500,000 new subscribers in Q2 2021 and beat revenue and earnings guidance.
- The quarterly results and increased guidance were overshadowed by stock movements driven by a one-time dividend, offering a potential opportunity for longer-range investors.
What they do:
McAfee sells consumer-specific internet security solutions. The products are highly rated and are effective at identifying, blocking, and eliminating threats.
McAfee offers several packages, which vary according to the number of devices included.
- Single device protection.
- Up to 5 devices.
- Up to 10 devices.
- A gaming-specific package that minimizes the draw on processing power.
- A stand-alone VPN.
- A “total protection” package including identity theft protection.
All of these packages include virus and malware protection, a password manager, safe web browsing, encryption of sensitive files, and a shredder feature that permanently destroys deleted files.
Customers that choose to auto-renew gain additional features, including a VPN.
The Company currently serves 19.4 million subscribers, up from 16.6 million a year ago. 600 million devices are currently protected by McAfee products.
McAfee recently closed an agreement to provide consumer security solutions to Samsung device users.
McAfee products protect computers, laptops, and phones using Windows, macOS, iOS, and Android. All major browsers are supported.
Why they’re spiking in interest:
Reddit discussion of $MCFE exploded on August 4, with mentions over the next 12 days jumping over 4400% from the previous 12 day period.
Examination of the comments reveals that almost none deal with the company and its medium to long-term prospects. Almost all revolve around the $4.50 one-time dividend that $MCFE declared to distribute a portion of the $4 billion enterprise unit sale to shareholders.
Options traders expected a rapid runup as traders picked up shares to exploit the dividend and an equally rapid drop as these holders sold the stock after collecting their dividend. Reddit conversation was dominated by strategies to exploit these movements.
The Company’s exceptional Q2 2021 results and raised guidance for the rest of the year went unnoticed in the frenzy of discussion over short-term trading opportunities.
Reddit commenters were so focused on the anticipated post-dividend selloff that there was virtually no discussion of the Company’s medium to long-term growth trend.
💸 Signal: 99.11% of the $MCFE float is held by 182 institutional holders. The Vanguard group bought 2.2 million shares on June 30, 2021
Why $MCFE could be valuable:
The cybersecurity market is growing fast, with a 10.9% annual CAGR expected through 2028.
Nearly half of mobile consumers do not currently protect their data, a clear market opening for McAfee’s mobile security solutions.
The Company’s latest quarterly report was exceptional: 22% revenue growth, 16.8% subscriber growth, and diluted EPS of $.21/share, above analyst estimates of $.18. The Company is raising its projections for 2021.
McAfee products get high effectiveness ratings from multiple independent evaluators.
Analysts expect $MCFE to achieve profitability in late 2021.
McAfee used $1 billion of the proceeds from the enterprise unit sale to retire debt, substantially reducing its debt obligations and interest expense.
The post-dividend selloff in the stock has created a potential buying opportunity for longer-term investors.
What the risks are:
McAfee faces intense competition, some of it from larger companies like industry leader Symantec. McAfee will have to continuously upgrade its products and marketing to stay competitive.
Internet security threats evolve on a daily basis and security providers must evolve with them. Any publicized failure could affect McAfee's competitive position.
It is extremely easy for cybersecurity product customers to switch products. Any perceived superiority of a competing product could bring a rapid drop in subscriptions.
McAfee devotes large sums to continuous R&D to continue developing new solutions and meet the evolving threat landscape. Any drop in revenues could lead to reduced spending in R&D which could lead to further drops in revenue, a downward spiral.
Bottom line: The short-term attention given to the stock movements surrounding the one-time dividend has largely obscured the discussion of McAfee's results and growth prospects. The very high institutional ownership provides a cushion against emotion-driven selling and could support appreciation on positive news or continued growth.
Teladoc Health, Inc. ($TDOC
$144.00 - Share price at the time of writing
- Teladoc provides remote health care services for health plans, hospitals, health systems, health employers, insurance and financial services companies, and other businesses.
- Teladoc has expanded its business through a number of strategic acquisitions.
- $TDOC shares soared during the pandemic, rising to a high of $293 before dropping to the current $144.00.
- Despite the easing of pandemic restrictions, Teladoc’s utilization and revenues have continued to grow.
What they do:
Teladoc is a global leader in virtual health care. Teladoc works on a business-to-business basis, serving employers, health plans, and other large healthcare consumers. The Company provides online consultations for conditions ranging from primary care to mental health to complex specialist cases.
Teladoc has made a number of important acquisitions.
- In 2020 Teladoc acquired Livongo Health, which provides monitoring of diabetes and other conditions.
- In 2020 Teladoc acquired InTouch Health, a virtual care provider with relationships with over 450 hospitals.
- In 2018 Teladoc acquired Advance Medical, which provides virtual care services in 125 countries.
Teladoc recently rolled out two new service packages supporting the company’s goal of providing “whole person” care.
- Primary360 for general health.
- myStrength for mental health.
The Company has important relationships with several major companies.
- In July 2021 Teladoc announced that it has signed a deal with health insurance specialist Health Care Service Corporation ($HCSG) to provide services for HSC’s 17 million insured members.
- In July 2021 Teladoc and Microsoft ($MSFT) announced a deal to offer Teladoc’s Solo platform through the Microsoft Teams environment.
- CVS Health ($CVS), one of the nation's largest pharmacy chains, provides online services using Teladoc in 26 states.
In Q2 2020, the peak of the pandemic, visits grew 203% over the same quarter in the previous year, with revenue up 85%. Many investors expected growth to taper off as the pandemic resolved, but Q2 2021 saw visits up a further 28% and revenue growth at 109%.
Why they're spiking in interest:
In the last month, Reddit mentions of $TDOC edged up 85% over the previous month, according to data from marketsream.io.
The activity appears to have been driven by several announcements and the resulting stock price movements.
The July 14 announcement of the Microsoft deal pushed shares from $146 to $151. The Q2 2021 earnings report drove an initial spike to $155, followed by a decline to $144 as investors focused on the larger-than-expected losses and the perception that the end of the pandemic would see a return to in-person doctor visits.
This appears to be an example of investors focusing on superficial items and ignoring the underlying story. Most comments (though not all) focused on short-term movements.
Notable comments from Reddit:
"Buying some TDOC given it's Cathie's 2nd biggest position and it's after 45% correction. Should be good risk to reward at this price."
"It took the delta variant fears to get TDOC back in the green. Will learn from last time and sell once the cases go back down.”
💸 Signal: Cathie Wood of ARKK Invest Holdings, owns $2.37 billion worth of $TDOC shares, her second-largest holding.
Why $TDOC could be valuable:
Telemedicine is not just a pandemic-driven flash in the pan.
COVID-related restrictions drove more rapid adoption of remote medicine. That doesn’t mean remote medicine will go away after the pandemic. Both consumers and providers have discovered its convenience and cost advantages and are sticking with it.
The industry is expected to show a CAGR of 19% through 2026.
McKinsey and Company report that around $250 billion in healthcare spending can be virtualized.
Remote care offers substantial cost advantages over in-person care. A strong incentive for adoption by insurance companies and large healthcare providers.
Teladoc is in a strong competitive position. It is currently the leading global provider of telemedicine services.
Teladoc recorded over 8.8 million patient visits in the first half of 2021, up 84% from the first half of 2020. Revenue over the same period was up 127% with monthly revenue per member up 142%.
Patients like the service. The Teladoc and Livongo apps have 340,000 reviews on Apple’s App Store, with an average rating of 4.8 out of 5 stars.
$TDOC stock is down over 50% from its peak on Feb. 8. The primary drivers of that selloff appear to be temporary concerns that do not affect the company’s long-term prospects.
We’ve already seen that growth has continued to be strong despite the relaxation of pandemic restrictions.
Many investors panicked at the larger-than-expected $.86/share loss posted in Q2. Looking deeper, though, we see that the loss was driven primarily by costs related to integrating the Livongo and InTouch acquisitions.
Take away those costs and the business is profitable: Teladoc’s Q2 adjusted EBITDA was $66.8 million, up 154% from the previous year. The gross margin for the quarter was an impressive 68.1%.
On July 31 analysts were covering $TDOC, with a consensus “buy” rating and an average price target of $227.14, 57.7% above today’s level.
What the risks are:
Teladoc currently dominates its market niche, but the potential of the industry invites competition. Most notably, Amazon is launching its Amazon Care service this summer, which could provide significant competition for $TDOC.
The licensing and regulatory environment for telemedicine is still evolving. Additional regulation could pose issues for TDOC, which operates simultaneously in different states and different countries.
There have been few recorded malpractice cases involving telemedicine, but legal liability is always a potential issue.
Teladoc has made a significant number of acquisitions. Integrating these acquisitions will take significant expense and management resources.
Failure to integrate them effectively could have an adverse impact on results.
Bottom line: Teladoc holds a dominant position in a fast-growing market. It is expanding its offerings and customer satisfaction is high. The recent selloff was driven largely by short-term factors and assumptions with a questionable basis, potentially creating an attractive entry point.