The Remote Connectivity Investment Thesis
Table of contents
As investors with a long-term horizon, we find it frustrating when a temporary investment thesis impacts a stock we’re holding or thinking about holding. For example, we recently looked at how Telehealth is More Than Just Virtual Doctor Visits. The best pure-play stock for the telehealth thesis, Teladoc, is up +112% year-to-date compared to a +30% gain in the Nasdaq over the same time frame. Some of that rise could be attributed to Teladoc’s acquisition of Livongo, but it’s most likely due to “the Rona.” Look no further than how Teladoc shares reacted to the news of a possible coronavirus vaccine – they fell nearly -14%.
Perhaps the most extreme example of a stock affected by the coronavirus thesis is Zoom, the video-first communications platform provider whose shares are up more than +500% since the beginning of the year. That’s after shares fell -17% in reaction to news of a possible vaccine.
In looking at the basic financials for Zoom, we can see that revenues have soared. In the third quarter of 2020, Zoom’s revenues were more than they brought in throughout all of 2019.
As incredible as that growth might be, it’s hard to argue it justifies a +500% appreciation in share price, especially when you consider that the recent rapid growth is due to a temporary thesis. The challenge is to determine how much potential this stock has once the pandemic cloud has passed.
What Zoom and Teladoc have in common is that they’re both part of a broader investment thesis surrounding remote connectivity.
The Remote Connectivity Thesis
Stay-at-home stocks like Peloton, Zoom, Slack, and Roku all dropped after vaccine news on Monday. But is the momentum for those names really over? That was the question raised in a Yahoo Finance article which argues that the post-pandemic prospects for each of these businesses need to be evaluated on a case-by-case basis. We agree, and one way to do that might be to ask, just how disruptive are the businesses these companies are engaging in?
Remotely Connecting with Doctors
Teladoc is the leader in telehealth, so we can consider them a proxy for the telehealth industry as a whole. In the third quarter of 2020, Teladoc saw around 2.8 million virtual doctor visits, about the same number they saw for the first three quarters of 2019 combined. While we can expect this surge to be temporary, people who have used a telehealth platform for the first time as a result of the pandemic will be more likely to do so in the future. Nobody enjoys thumbing through magazines in a doctor’s waiting room.
The bigger picture extends beyond just virtual doctor visits. Last month, Teladoc closed their acquisition of Livongo, a company that’s using big data and machine learning to better treat chronic diseases that account for about 75% of the nation’s aggregate health care spending. It’s a reminder that the term “telehealth” refers to a much broader scope of remote health care services:
Telehealth is about the connected world of IoT in healthcare where medical devices and wearables talk to the cloud, and machine learning algorithms help healthcare professionals administer precision medicine which caters to each patient’s unique situations.
Credit: Nanalyze
When shares of Teladoc dip on news of a coronavirus vaccine, that’s a buying opportunity. Notable disruptive tech investor ARK Invest recently increased their position in Teladoc across multiple ETFs. It’s a vote of confidence for the telehealth investment thesis extending way beyond the temporary uplift provided by the pandemic.
Remotely Connecting with People
With everyone remaining indoors, there’s a need for people to connect with one another for business and personal reasons. It’s hard to argue that connecting with your colleagues on a video conferencing call would be considered disruptive, as we’ve been doing it ever since WebEx was founded back in 1995. While improvements in bandwidth now make it easier to connect with large groups of people, the technology hasn’t changed a whole lot. What did change was demand.
With the arrival of the pandemic, demand for video teleconferencing went through the roof. Just look at how much Zoom’s meeting minutes increased as a result.
Video conferencing provides a substitute for meeting in person, something that will likely resume once the pandemic subsides. Sure, more people will work from home going forward, but there will still be less use of video conferencing when we return to the new normal. It’s easy to argue that we’re seeing peak usage of Zoom’s platform, which is why their investor deck emphasizes other areas of growth they plan to pursue such as international expansion and Zoom Phone.
Corporations have been remotely connecting with people for decades, and they’ve also been remotely connecting with their devices.
Remotely Connecting with Devices
Remotely connecting with your colleagues’ faces isn’t the same as remotely connecting with their computers and devices. Now that everyone is working from home, the ability for IT teams to remotely connect to machines and devices to solve problems is critical. This technology has been around for a while, but there’s an emerging demand for connectivity platforms that support all the Internet of Things (IoT) devices coming online.
A 2019 article by McKinsey titled Growing opportunities in the Internet of Things talks about how remotely connecting to devices extends beyond your company’s IT helpdesk into the world of IoT devices. The below diagram shows how the IoT technology stack has varying degrees of technological maturity at each level.
Simply put, the hardware is already sufficiently developed. So is the infrastructure required for connectivity. Our article on investing in IoT sensors shows just how many companies are already producing the hardware. Further up the stack, it’s the software that’s not yet technologically mature, and consequently, there’s a lot more room for growth. That’s where remote connectivity applications for IoT devices sit. The same holds true for business applications that will be built on top of the connectivity platforms, a market that’s the biggest opportunity of all.
McKinsey goes on to talk about how the growth of remote connectivity use cases for IT will grow in the double digits alongside IoT which will achieve 4x that growth in the coming years.
One company that’s a leader in remote connectivity happens to be publicly traded across the pond.
A Remote Connectivity Stock
We’ve talked before about how domestic bias leads investors to always look in their backyard for investment opportunities. Given half our readers hail from countries outside of America, we’re always scouring the planet for interesting investments that may be flying under the radar. One stock we’ve recently been digging is a leader in remote connectivity that’s only recently begun trading on the European markets. They’re one-tenth the size of Zoom by market cap, and cleared more revenues than Zoom did during 2019. Their business model is 100% software-as-a–service (SaaS), and their software has been installed on 2.5 billion devices.
The company’s CEO recently talked about how they’re seeing an increase in demand due to the coronavirus, yet the stock is only up +20% year-to-date compared to a Nasdaq return of +30% over the same time frame. Not only that, but they recently acquired an augmented reality firm, and they’re moving into IoT/AR offering similar to what PTC Inc. is doing. It’s a very interesting stock that we may be adding to our own portfolio, and we’ll tell you all about it in a coming piece our research team is working on as we type this.
Conclusion
The impact of a temporary investment thesis can obscure the real long-term potential of a business. In the case of telehealth, the short-term effects of a pandemic are an increase in remote doctor visits. The long-term vision of telehealth extends beyond that to the connected world of IoT in healthcare.
While video teleconferencing may be enjoying a temporary surge in popularity, remote connectivity for devices stands to benefit from both the pandemic and the emergence of IoT. In our next article on this topic, we’ll introduce you to a little-known remote connectivity stock that’s not only benefiting from the pandemic, but has long-term growth plans that include IoT and augmented reality.
Share
Don’t buy Zoom. It is going to lose large part of its value when vaccines are approved.
If you were going to buy Zoom, you’d do so because you believed in their long-term potential. That means you would see that upcoming dip as a buying opportunity. Teladoc is an example of a company we think has a lot of post-COVID potential and we hope it craters so we can add some more shares.