The market just released an unhealthy bubble comparison between AOL and Time Warner

This week’s earnings details have included some big name calculations with the value of high-growth, high-tech, high-risk companies. Ford and Amazon cancel stakes in electric vehicle maker Rivian; Alphabet and Microsoft observe some equity bets that decreased in value. But the valuation hit that was the biggest, and in its own microcosmic way, may speak loudest about the last decade of valuation gains in tech startups that has drawn comparisons to the dot-com bubble, comes from the medical care.

Health care was a prominent business in the pandemic market. This may seem obvious: a world facing a global medical crisis that cripples economies should realize the need for greater investment in health care. There were big winners whose business was directly related to pandemic risk and whose investors demonstrated the value of their foresight: namely, Moderna Therapeutics. But at a broader stock market level, digital health trading was in the category of stay-at-home stocks that posted big gains, as telehealth soared, with patients forced to seek care virtually and the adoption of digital services in all sectors. years of evolution in a period of months.

This topic now seems tenuous, and the business models these disruptors plan to use to turn pandemic plays into long-term healthcare winners are less certain. Much of technology has taken a hit since last fall, from enterprise cloud to biotech to fintech, but this week’s disastrous earnings from the leader in telehealth teladoc marked the low point for the healthcare version of this recent tech bubble trade. After booking a charge of more than $6 billion related to the acquisition of chronic care company Livongo, shares of Teladoc plunged and are now more than 80% down from a year earlier. Its 40% drop on Thursday underscored what has been a year-long train wreck for public digital health valuations: Competitors AmWell Y 1Life Health more than 80% in the last year, and the consumer health care company His and her health lowered more than 60%.

AmWell’s investors included Google, which put $100 million into the company in 2020.

The $6.6 billion impairment charge is excluded from earnings metrics, but it’s a big hit that ties directly to how Teladoc planned to make its business-from-home bridge a post-pandemic business. Teladoc purchased Livongo for $18.5 billion in cash and stock in late 2020 in the largest digital health deal to date.

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

CNBC’s Bob Pisani pointed to a sinister parallel market: AOL-Time Warner. A year after that deal, the combined company’s biggest headlines were referring not to synergies but to “goodwill impairments” as the value of the original landmark dot-com bubble deal, AOL, collapsed.

AOL-Time Warner write-downs were multiple magnitudes the size of Teladoc (before and after its collapse). But the collateral damage from the Teladoc disaster stretches across the recent era of disruptive investing and to one of its star stock pickers: ARK Invest’s Cathie Wood, who was among the only funds to invest in the “falling knife.” of Teladoc earlier this year, and had grown to become its largest shareholder. She was the third-largest holding in his biggest fund after Tesla and another home run: Zoom Video Communications.

Wood’s fund is undeterred, buying more Teladoc on Thursday, and the stock bounced a bit on Friday morning, even as other tech stocks continued to sell off. But in a sign of how much has been derived from the disruptive business theme, its flagship ARK Innovation Fund It has now suffered a fate familiar to the vast majority of investment management pairs, even those off to a good start: It is no longer ahead of the S&P 500 in performance since its inception. For any investor who survived the dot-com bubble and is old enough, or had parents old enough, to be convinced of the need to diversify from core capital to sector fund bets on science funds health, telecommunications and technology, the lessons should have been learned long ago.

The big issue for Teladoc is not simply whether it, Livongo and others find themselves in a period of resetting valuations before rising again, but whether cracks in the foundation of their business model have been exposed as the pandemic euphoria it erodes. Wall Street, which bailed out shares Thursday morning, is concerned, with one analyst writing of “cracks in TDOC’s entire health base as heightened competitive intensity weighs on growth and margins.”

And Wall Street points out that those cracks are occurring only in the areas where Teladoc planned to grow beyond the basic commoditized telehealth service, into the direct-to-consumer mental health and chronic care space of Livongo, expected growth engines for the next three years. years.

“While we are reluctant to make sweeping changes to our thesis based on a poor quarter, we doubt we will see competitively-driven headwinds abate anytime soon,” one downgraded analyst wrote. of actions.

Employers’ focus on wellness was seen as a tailwind for this sector, but there are now growing questions about how much corporate buyers will pay for these services. Sales cycles are lagging and employers paying very high wages and facing labor shortages are reevaluating their spending. “HR departments are getting compressed because there’s a lot going on with regards to returning to the role, dealing with the Great Resignation and all the hiring and resourcing of talent acquisition and retention,” said Teladoc CEO, Jason Gorevich.

The write-downs in Rivian holdings this week speak to what seemed quite logical in bubble talk after investors piled into EV shares. Valuation gains often reflect one 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 has little supply. Rivian was one of the only options in the public market to bet on electric vehicles other than Tesla.

But in digital health care, it is the players and not just the trade that have become crowded, a point Teladoc alluded to in his earnings. “We’re seeing customers inundated with a number of new smaller point solutions, which has created noise in the market,” Gorevic said.

This is why companies like Teladoc had been actively looking to scale, and across services, in mergers and acquisitions like the Livongo deal. Castlight Health merged with Vera Whole Health. Virgin Pulse tied with Welltok. Accolade bought PlushCare. Grand Rounds and Doctors on Demand merged. They also face the monstrous threat of Amazon, which this year began to be implemented your health service to corporate plans nationwide. Linking highly valued digital health companies may have led to valuations getting far ahead of the proof that the deals will work in a market pressured from all sides.

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

“The current performance of the market threatens to make a transition from a long and painful ‘correction’ to something more worrying,” according to a note from the president of Marketfield Asset Management, Michael Shaoul, quoted by CNBC. “What tends to be more important than price drops is the time it takes to repair a deep drop.”

Amazon falls more than 10% Friday is nothing in the big picture of the billion-dollar company it has become. But in an earlier era, it took Amazon a full decade to recover in stock price after the dot-com bubble burst.

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

But Teladoc’s CEO also admitted that “it’s still nearing completion with the integration, we don’t have the proof points behind it. So people are waiting and eager to see and early adopters are buying, but we haven’t yet.” It hasn’t caught up with most of the market.

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

—CNBC’s Ari Levy contributed to this report.