Big stocks need big ambitions to reach the next level. It's clear that a lot of players in Silicon Valley see Healthcare as their route to further success . . . and now is a great moment to weigh their moves against a few smaller BMR recommendations caught in the crossfire.
Alphabet (GOOG: $1,299, down 1% this week) is making headlines for partnering with hospital groups to start analyzing tens of millions of medical records. The goal is apparently to compare diagnostic results against statistical outcomes to flag risk factors and help physicians intervene more effectively when they can make a difference. Healthcare is big. Making providers even 1% more efficient opens up $35 billion a year in potential cash flow. From there, the opportunity ramps up to extremely high levels . . . and any company that can deliver systemwide results can reach for the stratosphere.
This is why Alphabet paid $2 billion for FitBit, which we would otherwise consider a faltering Medical Monitor franchise if not for the years of data all those devices have collected. Being able to find patterns among healthy exercise-conscious people as well as those who end up in hospitals will give Alphabet the keys to suggesting early treatment. Build that capability into future generations of Android devices and you've got a category-killing service.
That's the theory. It's going to take a little more time and effort for Alphabet to become a credible Healthcare player, but the potential is huge. Meanwhile, the company keeps sticking to its existing business, leaving those who depend on existing Search algorithms to twist. That's what happened to Expedia (EXPE: $96, down 6%) last quarter. Apparently the all-important algorithm confused hotel listings across the Travel sector, depressing performance by pushing corporate results down. To look at the stocks, you'd think it's the end of the world.
We disagree. For one thing, the algorithms come and go. People with hotel rooms and other products to sell figure out how they work and tailor their listings to get the best results. Expedia learned to game the system time and time again. They'll do it again. And don't listen to people fretting about mighty Alphabet squeezing out all independent Travel listings to capture all the commissions for themselves. That's been a rumor for at least a decade now and it's just never happened.
Alphabet loves Travel companies like Expedia because they spend a lot of money on Search advertising. If that proposition becomes too expensive or onerous, that money will go to platforms like Facebook instead. Alphabet doesn't want that. They aren't in the hotel business. Their sights are set much higher. We're looking for Expedia to rebound in the foreseeable future.
Speaking of Facebook (FB: $194, up 2%), news that the company is consolidating consumer payments across the core site as well as Instagram and other properties came as a shock to Square (SQ: $62, down 1%). But here's the thing: Square never ran transactions across those sites. It's just not their business and even if they get walled out of Facebook and Instagram, they're not surrendering any obvious opportunities. Let Facebook try to go it alone. Sooner or later, they'll call in an outside partner with technology that works. That might be Square.
Take a look at what's happening with Twilio (TWLO: $95, up 2%) for a demonstration of how this works. Twilio runs the messaging systems that make up Facebook's WhatsApp platform. It's a huge partnership, weighing in at 7% of Twilio revenue now. Rumors yesterday started circulating that Facebook is going to ease up in order to rebuild the platform around other people's software. At one point Twilio dropped 5% but recovered a lot of ground later on.
It's not hard to appreciate the rebound. Twilio has withstood these kinds of rumors before . . . two years ago, people were fretting that Uber would cut the company out of its app and the stock dropped to $24. Here we are now at nearly 300% beyond that depressed level. The business survived. It's thriving now, due to 75-80% revenue growth, which continues to this day.
We also can't ignore the fact that while management hasn't been pitch perfect with its communications with investors lately, the team recently gave RBC analysts an in-depth look at the business. They're excited. They didn't see Facebook turning away. The analysts came back and told their clients that this should be a $125 stock. Maybe they got pulled into a hype machine, but we don't think so. The in-depth tour trumps rumors. And once the market realizes that, Twilio will come back. Buy the dip.