iRhythm (IRTC)

Medical technology company iRhythm Technologies (NASDAQ:IRTC) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 20.3% year on year to $158.7 million. The company’s full-year revenue guidance of $695 million at the midpoint came in 2% above analysts’ estimates. Its non-GAAP loss of $0.95 per share was 1.5% below analysts’ consensus estimates.

Company Overview

Pioneering the shift from bulky, short-term heart monitors to sleek, wire-free patches, iRhythm Technologies (NASDAQ:IRTC) provides wearable cardiac monitoring devices and AI-powered analysis services that help physicians detect and diagnose heart rhythm disorders.

Patient monitoring companies within the healthcare equipment industry offer devices and technologies that track chronic conditions and support real-time health management, such as continuous glucose monitors (CGMs) and sleep apnea machines. These businesses benefit from recurring revenue from consumables and software subscriptions tied to device sales (razor, razor blade model). The rising prevalence of chronic diseases like diabetes and respiratory disorders due to an aging population as well as growing adoption of digitization are good for the industry. However, these companies face challenges from high R&D costs and reliance on regulatory approvals. Looking ahead, the sector is positioned for growth due to tailwinds like the rising burden of chronic diseases from an aging population, the shift toward value-based care, and increased adoption of digital health solutions. Innovations in AI and machine learning are expected to enhance device accuracy and functionality, improving patient outcomes and driving demand. However, there are headwinds such as pricing pressures as healthcare costs are a key focus, especially in the US. An evolving regulatory landscape and competition from more tech-forward new entrants could present additional challenges.

iRhythm's main competitors include BioTelemetry (acquired by Royal Philips), Preventice Solutions (acquired by Boston Scientific), and Bardy Diagnostics (acquired by Baxter International). The company also competes with traditional Holter monitor manufacturers like GE Healthcare, Philips Healthcare, and Welch Allyn (now part of Baxter International).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $618.6 million in revenue over the past 12 months, iRhythm is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, iRhythm’s 21.9% annualized revenue growth over the last five years was excellent. Its growth beat the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. iRhythm’s annualized revenue growth of 19.9% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, iRhythm reported robust year-on-year revenue growth of 20.3%, and its $158.7 million of revenue topped Wall Street estimates by 3.3%.

Looking ahead, sell-side analysts expect revenue to grow 14.4% over the next 12 months, a deceleration versus the last two years. Still, this projection is commendable and implies the market sees success for its products and services.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

iRhythm’s high expenses have contributed to an average operating margin of negative 23.9% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, iRhythm’s operating margin rose by 4.7 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its recent improvements as the company’s margin has increased by 6.6 percentage points on a two-year basis.

This quarter, iRhythm generated a negative 20.5% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

iRhythm’s earnings losses deepened over the last five years as its EPS dropped 5.5% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, iRhythm’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, iRhythm reported EPS at negative $0.95, up from negative $1.23 in the same quarter last year. Despite growing year on year, this print slightly missed analysts’ estimates. Over the next 12 months, Wall Street expects iRhythm to improve its earnings losses. Analysts forecast its full-year EPS of negative $2.80 will advance to negative $1.47.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

iRhythm’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 11.9%. This means it lit $11.95 of cash on fire for every $100 in revenue.

Taking a step back, an encouraging sign is that iRhythm’s margin expanded by 7.6 percentage points during that time. In light of its glaring cash burn, however, this improvement is a bucket of hot water in a cold ocean.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

iRhythm has $520.6 million of cash and $735.5 million of debt on its balance sheet. Two things are particularly relevant here for investors in high-quality companies: 1) that debt levels aren't too high and 2) that interest payments are not excessively burdening the business.

With $1.74 million of EBITDA over the last 12 months, iRhythm’s net-debt-to-EBITDA ratio sits at 123.7x, showing it is overleveraged. We also view its annual interest payments of $7.27 million as high enough to hinder the performance of the business.

If the company’s profitability falls or the market turns unexpectedly, credit agencies could downgrade the company’s rating, making incremental borrowing more expensive and restricting growth prospects. We believe this puts iRhythm in a risky situation, something we seek to avoid. We hope iRhythm can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We enjoyed seeing iRhythm beat analysts’ revenue and EBITDA expectations this quarter. We were also glad its full-year revenue guidance exceeded Wall Street’s estimates. On the other hand, its EPS slightly missed. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 4.6% to $114.01 immediately following the results.

Updated: May 22, 2025 at 11:50 PM EDT

Are you wondering whether to buy iRhythm or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

iRhythm isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its declining EPS over the last five years makes it a less attractive asset to the public markets. And while the company’s rising cash profitability gives it more optionality, the downside is its operating margins reveal poor profitability compared to other healthcare companies.

iRhythm’s EV-to-EBITDA ratio based on the next 12 months is 79.5x. At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $140.42 on the company (compared to the current share price of $139.69).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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