ResMed: A Wide Moat Priced Beyond Its Worth

RMD · ResMed · Published Jul 16, 2026

Gate 1: Circle of Competence

ResMed sells CPAP and BiPAP devices for obstructive sleep apnea, along with masks and other consumables, and wraps them in cloud software — myAir for patients, AirView for remote monitoring by physicians and DMEs (durable medical equipment providers), Brightree for back-office workflow. The device is the razor; masks, cushions, filters, and services are the blades. Consumables and services make up roughly 35–40% of revenue, and recurring revenue grew about 12% in FY2025.

The business is knowable. EDGAR filings, earnings call transcripts, conference presentations, and the company’s own patient-tracking data (over 1.9 million patients on GLP-1 questions alone) reconstruct the picture easily. Predictability is conditional rather than iron-clad: OSA is a chronic condition affecting an estimated 1 billion people globally, with low diagnosis and treatment rates and a treatment-and-reimbursement infrastructure with strong inertia. The single probabilistic variable is GLP-1 weight-loss drugs — but three years of measured data point to complement, not substitute: patients prescribed GLP-1s after an OSA diagnosis are 10.8 percentage points more likely to start CPAP, show higher consumables repurchase rates at one and two years, and most patients stop GLP-1s within a year. This is a wager on the inertia of established treatment infrastructure, not on clinical outcomes.

FY2025 revenue was $5.1 billion (+10%), with non-GAAP gross margin of 60%, operating margin around 33%, and free cash flow of roughly $1.7 billion. Global CPAP device market share of 55–60% makes it the clear leader. This passes both layers.

Gate 2: Moat

Three sources, with switching costs as the core. Patients are locked into myAir and mask fitting; physicians and DMEs into AirView and Brightree — 28 million patients’ cloud data sits deep inside clinical workflows. Intangibles add roughly 9,700 global patents, plus technology leadership including the first FDA-authorized AI-equipped CPAP (Smart Comfort) in December 2025. Scale provides cost advantage.

The evidence of pricing power is indirect but telling: even after Philips restored production in 2024–25 and device price competition resumed, gross margin expanded 200+ basis points for two consecutive years — through mix and efficiency, not price cuts. The US DME channel is price-regulated by CMS, so this is not an unlimited-price-increase moat; a 2026 CMS competitive bidding round excluded CPAP, easing reimbursement risk.

The moat is widening. Share gained after Philips’ 2021 recall has stuck, and the software ecosystem and recurring revenue keep growing. The risk is Philips’ full US re-entry in 2026 — so far, evidence of share recovery is limited. The AI-era reassessment strengthens the case: the world’s largest proprietary sleep dataset feeding products that improve with it is a textbook reinforcing flywheel. Even as AI models commoditize, the data and the physician/DME distribution network remain.

Gate 3: Management

CEO Mick Farrell has run the company since 2013. Dividends have risen 14 consecutive years (most recently +13%, $2.40 annually). Buybacks of $300–500 million in FY2025 scale up to $800 million+ in FY2027 — increasing repurchases in 2026, after a 20%+ share decline, is the right direction. M&A has been tuck-in oriented: Brightree ($800 million, 2016), MEDIFOX DAN (2022), Noctrix Health ($340 million, 2026, adjacent sleep market). No empire-building.

The retained-earnings test passes: five-year average ROE of 21.2% with a standard deviation of just 2.8%, achieved with low leverage (debt/equity 0.11). On candor, management confronts the GLP-1 issue head-on, publishing its own cohort data (1.9 million+ patients) quarterly — releasing data on an unfavorable question is evidence of honesty. One deduction: the 2026 announcement of a CFO change shook market confidence; no evidence of structural problems, but worth watching.

Gate 4: Price

Owner earnings are $1.509 billion (consistent with FY2025 FCF of about $1.7 billion — a capital-light device business with good cash conversion). That yields an owner-earnings yield of 5.2% against the 10-year Treasury at 4.3% — a thin 0.9-point cushion, not a meaningful premium.

Valuation: given low OSA penetration (single-digit treatment rates) and the recurring revenue structure, a low-growth 12x multiple understates the business; but GLP-1’s long-term uncertainty makes an unconditional “certain growth” 15x hard to grant. The range:

Intrinsic value: $18–23 billion. The market cap is $28.8 billion — a roughly 27% premium even to the growth case. The P/E of 18.6x looks cheap against the company’s own 25–30x history, and the 2026 stock is down 30% from its peak — but that is “cheaper than before,” not “cheap versus intrinsic value.” There is no margin of safety. The target buy price is a 30% discount to 15x owner earnings: roughly $15.8 billion market cap, about $105–110 per share — some 45% below the current price. If owner earnings compound at 10% annually, the target band could rise into today’s price range within a few years, so recalculate quarterly.

Verdict

Three of four gates pass with conviction: a razor-and-blades recurring model, dominant share, a data flywheel moat that AI reinforces, and 14 years of disciplined capital allocation. But there is no margin of safety — the market pays a premium even to the optimistic case, and the owner-earnings yield barely clears the risk-free rate. Verdict: watch. If Mr. Market’s GLP-1 fear overshoots toward a market cap near $16 billion (about $105–110 per share), this graduates to candidate; conversely, a structural reversal in the GLP-1 cohort data — next-generation drugs achieving durable disease resolution with high persistence — or a successful Philips share recovery would break the thesis itself.

Postscript: the August shakeout

The thesis date above is mid-July; the subsequent weeks tested the nerve, though not the argument. After FY2026 Q4 results on August 6 — revenue of $1.5 billion (+9%), non-GAAP EPS of $2.95 (+16%), gross margin of 62.3% — the stock fell 8.85% intraday on August 7, driven not by GLP-1 fears but by the first FY2027 guidance: core revenue growth of 5–7%, a $75 million headwind from an Astral field safety action, and roughly $0.20 of adjusted EPS dilution from the MatrixCare divestiture ($490 million) and Noctrix acquisition. None of this touches the thesis’s premises. The quarter’s monitoring signals passed: gross margin above 60%, masks and consumables +11%, and the GLP-1 cohort gap confirmed on the call at 1,070 basis points — essentially the same figure cited above — with repurchase advantages persisting at one year (+340bp) and three years (+600bp). Notably, over 40% of patients started PAP within 90 days of diagnosis versus under 3% starting GLP-1s.

The price recovery was swift: $211.94 at the August 7 close (−5.04%), then $220.05 on August 10 (+3.83%, recovering 71.8% of Friday’s drop) and $224.84 on August 11 — a market cap of $31.92 billion, a 36%+ premium to the growth-case intrinsic value at the August 8 close ($30.75 billion) and roughly $26 billion above the target buy range. The owner-earnings yield has oscillated around the 10-year Treasury — 4.73% at the August 10 close, roughly in line by August 11 — a thin, unstable cushion. The conclusion stands: the business was never the problem; the price was. And the price has moved further from, not closer to, the buy zone.

This analysis is AI-generated, educational, and not investment advice. Figures may contain errors or be delayed. Disclaimer