ResMed's Q4 Sales Beat Expectations, But Stock Drops on Mixed Market Reaction

ResMed (NYSE:RMD), a leading provider of medical devices for respiratory disorders, reported better-than-expected sales in the fourth quarter of 2024. However, the company's stock price dropped despite the positive results, reflecting a mixed market reaction to the earnings report. In this article, we will analyze the key factors contributing to ResMed's strong sales performance and explore the reasons behind the stock's decline.

ResMed's Q4 sales grew by 9% year-over-year (YoY) to $1.28 billion, surpassing the consensus estimate of $1.27 billion. The company's operating income also increased by 38% YoY to $435.9 million, while non-GAAP operating income grew by 30% to $424 million. These impressive financial results were driven by several key factors:

1. Increased demand for sleep devices and masks portfolio: ResMed's revenue grew by 10% on a constant currency basis, primarily due to the strong demand for its sleep devices and masks portfolio. This growth was likely driven by the ongoing need for sleep apnea treatment and the company's innovative product offerings.
2. Strong growth in Software as a Service (SaaS) business: ResMed's SaaS business also contributed to the company's better-than-expected sales. The growth in this segment can be attributed to the increasing adoption of digital health solutions and the company's focus on providing comprehensive, connected care solutions.
3. Market leadership and competitive edge: ResMed maintains its dominant market position in the growing yet significantly under-penetrated sleep apnea market. The company's continuous product advancements, driven by its 6-7% annual R&D investment, have solidified its competitive edge. Additionally, Philips' ongoing product recalls have further strengthened ResMed's market leadership.

Despite these positive results, ResMed's stock price dropped following the earnings report. This decline can be attributed to a few factors:

1. Market expectations: Although ResMed's sales results were positive, they may not have met the high market expectations. The company's revenue of $1.28 billion was slightly below the consensus estimate of $1.29 billion. This discrepancy could have led to a sell-off in the stock.
2. Gross Margin Expansion: While ResMed's gross margin expanded by 230 basis points to 59%, the market may have been expecting a more significant improvement. The company attributed this expansion to chip shortages and cost component inflation returning to normal levels, as well as an improved revenue mix. However, investors might have been hoping for a more substantial increase in gross margins.
3. Device Sales Growth: Although device sales increased by 12%, which is a positive sign for future revenue growth, the market might have been expecting a more significant increase. The company's guidance for gross margins of 60% in H2 FY 2025 could be seen as conservative, potentially leading to a sell-off in the stock.
4. GLP-1 Weight-Loss Drugs: The meteoric rise in popularity of GLP-1 weight-loss drugs like Ozempic and Wegovy has raised concerns about their potential impact on the total addressable market for sleep apnea. Although ResMed's financial results continue to demonstrate strong market penetration, investors might be worried about the long-term effects of these drugs on the company's growth prospects.

In conclusion, ResMed's Q4 sales results were driven by increased demand for its products, strong growth in its SaaS business, and its market leadership position. However, the stock price dropped due to mixed market reactions, including unmet expectations, gross margin expansion, and concerns about the impact of GLP-1 weight-loss drugs on the company's growth prospects. As ResMed continues to deliver strong financial results and address these concerns, it could lead to a rebound in the stock price.