Investment Outlook
POSITIVE outlook with 19.8% upside potential
Investment Outlook
ResMed presents a compelling investment opportunity with our base case DCF valuation of $203.68 per share, representing approximately 20% upside from the current price of $170.00. The company's dominant position in the significantly underpenetrated sleep apnea market provides substantial growth runway, with less than 20% of an estimated 936 million people with moderate to severe sleep apnea currently diagnosed or treated.
The investment case is strengthened by ResMed's exceptional financial performance in FY2024, including 11% revenue growth, 17% operating profit growth, and remarkable cash flow generation that more than doubled year-over-year. The company's dual-segment strategy combining medical devices with growing SaaS solutions creates multiple value drivers and margin expansion opportunities.
Key risks include regulatory changes affecting reimbursement, the uncertain long-term impact of GLP-1 weight loss medications on sleep apnea treatment demand, and eventual competitive normalization as Philips resolves its recall issues. However, the asymmetric risk-reward profile (53% bull case upside versus 15% bear case downside) supports a positive stance on the shares.
Executive Summary
Strong financial performance with significant market opportunity ahead
ResMed delivered exceptional financial results in FY2024, demonstrating the strength of its market-leading position in sleep apnea and respiratory care. Revenue grew 11% to $4.69 billion, driven by strong performance across both the Sleep and Respiratory Care segment (10% growth, 87.5% of revenue) and the higher-margin SaaS segment (17% growth, 12.5% of revenue). Operating profit increased 17% to $1.32 billion, with margins expanding 140 basis points to 28.2% due to operational efficiencies and favorable product mix.
The company's cash flow generation was particularly impressive, with operating cash flow more than doubling to $1.40 billion, enabling significant debt reduction (50.9% decrease) while simultaneously increasing shareholder returns through higher dividends (up 9.3%) and share repurchases ($150 million). This financial strength positions ResMed well to capitalize on the massive untapped opportunity in sleep apnea treatment, where market penetration remains below 20% globally.
Looking forward, ResMed benefits from structural tailwinds including the shift toward home healthcare, increasing sleep health awareness, and the growing adoption of connected medical devices. The SaaS segment provides additional growth momentum and margin expansion opportunities through both organic growth and strategic acquisitions.
Company Overview
Global leader in sleep apnea and respiratory care solutions
ResMed Inc. is a global leader in digital health and cloud-connected medical devices, specializing in the treatment of sleep apnea, chronic obstructive pulmonary disease (COPD), and other chronic respiratory disorders. Founded in 1989 by Dr. Peter Farrell in Australia, the company pioneered CPAP (continuous positive airway pressure) therapy as the first successful non-invasive treatment for obstructive sleep apnea.
The company operates through two distinct segments: Sleep and Respiratory Care (88% of FY2024 revenue) and Software as a Service (12% of revenue). The Sleep and Respiratory Care segment generates revenue through device sales such as CPAP machines and ventilators, along with masks and accessories using a razor/razor-blade model. The SaaS segment provides healthcare management software platforms to out-of-hospital providers on a subscription basis.
Market Leadership Position
ResMed serves over 140 countries with approximately 9,980 employees across manufacturing facilities in Australia, Singapore, Malaysia, France, China, and the United States. The company has benefited significantly from a major competitor's (Philips) product recall beginning in 2021, creating additional market share opportunities.
Led by CEO Michael "Mick" Farrell since 2013, ResMed maintains a strong focus on innovation with R&D spending at 6.6% of revenue. The company's connected device ecosystem generates valuable patient data while supporting the broader healthcare shift toward home-based and lower-cost care settings.
Latest Results
FY2024 results demonstrate strong execution across all business segments
| Metric | FY2024 | FY2023 | YoY Change |
|---|---|---|---|
| Revenue | $4,685.3M | $4,223.0M | +11.0% |
| Gross Margin | 56.7% | 55.8% | +90bps |
| Operating Income | $1,319.9M | $1,131.9M | +16.6% |
| Operating Margin | 28.2% | 26.8% | +140bps |
| Net Income | $1,021.0M | $897.6M | +13.7% |
| Diluted EPS | $6.92 | $6.09 | +13.6% |
| Operating Cash Flow | $1,401.3M | $693.3M | +102.1% |
| Free Cash Flow | $1,301.8M | $573.6M | +127.0% |
ResMed's FY2024 results exceeded expectations across all key metrics, with revenue growth of 11% driven by strong demand for sleep devices and masks. The Sleep and Respiratory Care segment grew 10%, with particularly robust 14% growth in the higher-margin masks and accessories category. The SaaS segment delivered impressive 17% growth, including 9% organic growth in the home medical equipment vertical.
Profitability metrics showed consistent improvement, with gross margin expanding 90 basis points to 56.7% due to reduced freight costs, manufacturing efficiencies, and favorable product mix. Operating margin increased 140 basis points to 28.2%, demonstrating effective cost management while maintaining R&D investment at 6.6% of revenue.
Exceptional Cash Flow Performance
The most dramatic improvement was in cash flow generation, with operating cash flow more than doubling to $1.40 billion, driven primarily by significant inventory optimization (17.6% reduction) and strong operating performance. This enabled substantial debt reduction of 50.9% while increasing shareholder returns.
Balance sheet strength improved significantly, with the debt-to-equity ratio falling to a conservative 0.15 from 0.35 in the prior year. The company returned $432.3 million to shareholders through dividends ($282.3 million, up 9.3%) and share repurchases ($150 million), while maintaining financial flexibility for growth investments.
Financial Forecasts
Projecting continued growth with margin expansion through FY2029
Our financial forecasts project revenue growth moderating from 10.5% in FY2025 to 8.5% by FY2029, reflecting the natural deceleration as ResMed scales while maintaining strong momentum in both segments. The Sleep and Respiratory Care segment is forecast to grow at an 8.0% CAGR, while the higher-margin SaaS segment is projected to achieve 14.0% CAGR, creating a positive mix shift.
| Metric | FY2025E | FY2026E | FY2027E | FY2028E | FY2029E | CAGR |
|---|---|---|---|---|---|---|
| Revenue ($M) | 5,177 | 5,693 | 6,234 | 6,794 | 7,371 | 9.2% |
| Gross Margin | 58.5% | 58.9% | 59.3% | 59.7% | 60.1% | +110bps |
| Operating Margin | 28.5% | 28.8% | 29.1% | 29.3% | 29.5% | +130bps |
| Free Cash Flow ($M) | 1,261 | 1,401 | 1,550 | 1,701 | 1,859 | 10.2% |
Margin expansion is expected to continue through operational leverage and product mix improvements, with gross margins projected to reach 60.1% by FY2029 and operating margins expanding to 29.5%. Free cash flow is forecast to grow at a 10.2% CAGR, slightly exceeding earnings growth due to continued working capital efficiency. Capital expenditures are projected at 2.1% of revenue, consistent with historical levels, supporting ongoing manufacturing capacity and technology infrastructure investments.
Valuation Analysis
Multiple methodologies support $190-225 per share valuation range
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $203.68 |
| DCF - Bull Case | $260.00 |
| DCF - Bear Case | $145.00 |
| EV/EBITDA Multiple - NTM | $200.59 |
| P/E Multiple - NTM | $201.24 |
| PEG Ratio | $204.00 |
| Precedent Transactions | $226.06 |
| Implied Valuation Range | $190.00 - $225.00 |
| Current Share Price | $170.00 |
| Upside to Base Case | +19.8% |
Our valuation analysis employs multiple methodologies to triangulate ResMed's intrinsic value, with greatest weight placed on the DCF approach given the company's predictable cash flows and growth profile. The base case DCF yields $203.68 per share using a WACC of 8.7% and terminal growth rate of 3.5%, representing approximately 20% upside from current levels.
The valuation is supported by multiple-based approaches, with EV/EBITDA (16x) and P/E (25x) methodologies yielding values around $200-201 per share. These multiples are justified by ResMed's superior margins, strong cash flow generation, and sustainable growth outlook in underpenetrated markets.
Bull Case: $260.00
- 12.5% revenue CAGR
- 31.0% operating margin
- 4.0% terminal growth
Base Case: $203.68
- 9.2% revenue CAGR
- 29.5% operating margin
- 3.5% terminal growth
Bear Case: $145.00
- 6.0% revenue CAGR
- 26.5% operating margin
- 3.0% terminal growth
The asymmetric risk-reward profile (53% potential upside versus 15% potential downside) suggests a favorable investment proposition, with the current share price reflecting excessive caution regarding potential headwinds from GLP-1 medications and regulatory changes.
Risk Analysis
Key risks include regulatory changes and emerging pharmaceutical trends
Regulatory & Reimbursement Changes
Impact: Medicare telehealth flexibilities expiring end-2024 could reduce sleep apnea diagnosis rates
Mitigation: Active engagement with policymakers, geographic diversification efforts
GLP-1 Medication Impact
Impact: Weight loss medications could reduce sleep apnea severity, affecting long-term device demand
Mitigation: Positioning as diagnostic catalyst, monitoring clinical evidence
Supply Chain Disruptions
Impact: Semiconductor shortages limiting production of connected devices
Mitigation: Supplier diversification, minimum purchase obligations, inventory optimization
Competitive Pressure
Impact: Philips recall benefits will diminish as competitor resolves issues
Mitigation: Continued R&D investment (6.6% of revenue), product innovation, market expansion
The primary risk exposure centers on regulatory and reimbursement changes, particularly given ResMed's 64% revenue concentration in the U.S. market. The expiration of Medicare telehealth flexibilities could negatively impact diagnosis rates, while ongoing reimbursement model adjustments create persistent uncertainty.
The emergence of GLP-1 weight loss medications presents a complex risk with uncertain implications. While management frames this as potentially positive for increased diagnostics, the medications' weight-reduction effects could reduce sleep apnea severity in some patients, affecting long-term treatment demand and creating forecast uncertainty beyond year three.