We note this week that the economic situation seems to look better than anyone would have hoped at this point in the pandemic. It is not as bad as everyone thought it would be. Even the Fed chair Jerome Powell noted that the recovery has been faster than expected. Q2 is likely to have been like the bottom and Q3 is expected to show some expansion. The holiday season preparations are hitting top gear and many are expecting retail to do well. Stimulus packages in the US are not coming soon given stalling talks, but this can’t come sooner as a boost to consumers and small businesses who are struggling.
Telehealth is Slowing Down
There has been a seismic shift in attitudes towards telehealth in the pandemic with patients more open than ever to online doctor visits. Data from Wellframe’s COVID-19 Chronic Condition Patient Population Report from June this year showed that ~66% of total respondents (~74% of those below 29) would love to use a virtual care management team to manage mental health difficulties brought about by COVID-19. It seems like the younger the patients, the more receptive they are of telemedicine. A study published in the Journal of the American Informatics Association showed telemedicine usage was highest among patients aged 20 to 44 years. Furthermore, urgent and nonurgent virtual-care visits grew by 683% and 4,345%, respectively, between March 2 and April 14. In short, virtual healthcare has been nothing short of a hit in this pandemic. Some of the biggest beneficiaries of this have been companies like Livongo (NASDAQ:LVGO) and Teladoc (NYSE:TDOC), in which we took some positions earlier this quarter. Here is Teladoc Health CEO Jason Gorevic:
“…as we went through the time period from March through June, July, we saw the market accelerate by probably three years or four years over the span of just three months or four months.”
A note of caution that we noted in earnings call last week was that the pace of growth is slowing down. What is becoming clear is that April was the peak. According to national data from Epic, an electronic health record provider, by mid-July, telehealth visits accounted for 21% of total encounters, down from 69% in mid-April. What’s worse is that the drop-off has been across all geographical regions in the US as the figure below shows. The researchers noted that this could be because of “patient and provider preferences for in-person visits and/or reduced payer reimbursement for telehealth visits.” Healthcare providers are trying to find the best combination of face-to-face and telehealth services to give to patients.
Source: Epic Health
“We’re trying to right-size, but it’s really hard because during the pandemic we switched to nearly 100% virtual in some clinical areas and we know that’s not realistic or sustainable.” – Michigan Medicine director of virtual care Jessie DeVito
What gives us hope is that virtual healthcare is here to stay and that attitudes towards it have changed with healthcare providers, insurers, and employers more open to it. We are convinced that change is happening in the medical field. It is not a surprise that the adoption rate of telehealth is plateauing, but we are happy that it is plateauing at a much higher level than pre-pandemic. The future looks bright:
“The best harbinger for understanding the future of the business is new bookings, and that is actually up 300%.” – MDLive CEO Charles Jones,
Cloud is Still Growing
While tech is slowing down, one industry that is not slowing down any time soon is cloud and cloud computing. From the transcripts we have read of companies operating in this space, the expectation is for H2 2020 results to blow through the roof. We took a few positions earlier this quarter in some of these cloud providers like Microsoft (NASDAQ:MSFT) to take advantage of this. We have a conviction there is room for growth in this sector. We got further reassurance that this growth is sustainable and that we are only in the early innings of cloud from various management teams these past few weeks:
“People always ask me, How is that possible? How are we still in the early innings of cloud? The reality of it is most of software is still purchased on premises. And most of enterprise IT is still hardware and services. So there’s a long way to go to make it a software only in a cloud only world. And we are in the early innings of these things.” – Okta (OKTA) COO Frederic Kerrest
“…enterprises run 75% of their applications on-premise. However, they are being impacted in very profound ways by cloud computing. And so they are now finding themselves at an inflection point.” – Nvidia Corporation (NVDA) Senior Director of Product Management in Data Center Paresh Kharya
“…we think about the TAM, the total addressable market, depending on how you measure it or which analysts you are looking at, roughly about sort of core productivity and cloud duration side of it, it’s about $200 billion to $300 billion. So it is quite large.” – Microsoft COO Kirk Koenigsbauer
Digital sales are proving to be sticky
No doubt that most restaurant businesses have been struggling in this pandemic and many have had to close shop, sometimes permanently. Data from Yelp shows that of all the 163,00 businesses that have closed shop on the website, around 32,100 are restaurants. Of these 32,100 restaurants that have closed, ~61% have closed permanently. To make matters worse for the sector, studies show that those who test positive for COVID-19 are twice as likely to have eaten at restaurants in the 14 days before they became unwell. As such, customers are way more likely to avoid dining out given the fear of contracting the virus. One of the few bright spots in this industry has been Chipotle (CMG) which has been keen on investing in digital growth. While overall sales declined in Q2, digital sales grew by 216.3% YoY. The expectation is for digital sales to grow by 2.4X this year from $1 billion last year.
With such a big bet on digital sales to grow, we have been worried that growth in digital sales might slow down or decline should more premises open and customers choose to order online less. These fears have been put to rest this past week by Chipotle Mexican Grill CEO Niccol:
“…as regions around the country come back at different levels, the good news, we’re seeing our digital business is staying at 70% to 80% of where it… peaked even while dining rooms are coming back.”
Drive-thru digital order pick-up Chipotlanes have also been a hit with customers. The feedback has been impressive as customers love the convenience benefit. There are 100+ of them as of now in more than 32 states with a strong desire to see that number grow rapidly. They are comping at a higher level than non-Chipotlanes (newer ones are comping at 10-30% higher) with margins higher also. Given this success, 60-70% of planned openings and reopenings this and next year expected to be Chipotlanes. Here is the CEO again:
“…if our average restaurant is at 50% digital, an average Chipotlane is at about 60%, and roughly 2/3 of that 60% is order ahead and pickup, which is our highest margin transaction… The delta on the investment is about $75,000… so a $75,000 investment to get a couple of $300,000 of extra cash flow at higher-margin pass-through… it’s a no-brainer, and that’s why we’re leaning in to Chipotlane.” (Emphasis mine)
As the holiday season nears, the general mood is slightly positive; digital sales, especially at restaurants, are proving to be sticky and telehealth growth seems to be slowing down and plateauing but at higher levels than pre-pandemic. We close the week with this sort of optimism.
Disclosure: I am/we are long MSFT, TDOC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.