Resmed (ASX: RMD) rallied today, on the back of positive quarterly results that highlighted the success of the company’s strategy. The business recorded revenue growth of 16% and profit growth of 22%, both of which were above market expectations. The particularly bright spot, however, lies in software as a service revenue growth, which came in at 83%. The SAAS business provides a higher quality recurring revenue stream, so the fact that it makes it up a growing share of the business improves the overall earnings profile of Resmed. This has caused a multiple expansion in Resmed, partially explaining why the share price has been outpacing earnings for some time. SAAS companies often trade on revenue multiples, and Resmed would look cheap relative to peers with similar growth rates and competitive moats if it was priced purely as a healthcare SAAS business.
Resmed (ASX: RMD) Airsense sleep apnea product (Credit: CPAP Clinic)
Resmed was one of the first companies to develop advanced solutions that keep people out of hospitals and empower them to live healthy, high-quality lives. While the products mainly focus on COPD and sleep apnea, they also cater to a range of other sleeping conditions. Sleep apnea is a sleeping disorder that results in breathing stopping and starting throughout the night, disrupting the body’s natural sleep patterns. It typically manifests itself through loud snoring and the sufferer waking up tired after a full night’s sleep.
The company has a large market opportunity that is open to it since more than 80% of sleep apnea cases are undiagnosed. While not all these people would purchase a Resmed product if they understood the benefits, it would open up new sales prospects that would not have previously engaged with the business. The company has benefitted from effective marketing and sales execution to exploit the opportunity, and this will need to continue for the company to justify current multiples.
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