RadNet (RDNT)

Diagnostic imaging company RadNet (NASDAQ:RDNT) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 9.2% year on year to $471.4 million. Its non-GAAP loss of $0.35 per share was significantly below analysts’ consensus estimates.

Company Overview

With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.

The testing and diagnostics services industry plays a crucial role in disease detection, monitoring, and prevention, serving hospitals, clinics, and individual consumers. This sector benefits from stable demand, driven by an aging population, increased prevalence of chronic diseases, and growing awareness of preventive healthcare. Recurring revenue streams come from routine screenings, lab tests, and diagnostic imaging, with reimbursement from Medicare, Medicaid, private insurance, and out-of-pocket payments. However, the industry faces challenges such as pricing pressures, regulatory compliance, and the need for continuous investment in new testing technologies. Looking ahead, industry tailwinds include the expansion of personalized medicine, increased adoption of at-home and rapid diagnostic tests, and advancements in AI-driven diagnostics that enhance accuracy and efficiency. However, headwinds such as reimbursement uncertainties, competition from decentralized testing solutions, and regulatory scrutiny over test validity and cost-effectiveness may impact profitability. Adapting to evolving healthcare models and integrating automation will be key for sustaining growth and maintaining operational efficiency.

RadNet competes with other outpatient imaging center operators like Akumin (NASDAQ:AKU), as well as hospital-based imaging departments, physician-owned imaging centers, and other healthcare facilities offering diagnostic imaging services.

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 $1.87 billion in revenue over the past 12 months, RadNet 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 sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, RadNet’s 9.9% annualized revenue growth over the last five years was decent. Its growth was slightly above 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. RadNet’s annualized revenue growth of 12.4% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

This quarter, RadNet reported year-on-year revenue growth of 9.2%, and its $471.4 million of revenue exceeded Wall Street’s estimates by 6.4%.

Looking ahead, sell-side analysts expect revenue to grow 5.9% over the next 12 months, a deceleration versus the last two years. Still, this projection is above the sector average and implies the market is baking in some success for its newer products and services.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

RadNet was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.7% was weak for a healthcare business.

Looking at the trend in its profitability, RadNet’s operating margin decreased by 1.9 percentage points over the last five years. A silver lining is that on a two-year basis, its margin has stabilized. Still, shareholders will want to see RadNet become more profitable in the future.

This quarter, RadNet generated an operating profit margin of negative 5.1%, down 7.7 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

RadNet’s EPS grew at an astounding 20% compounded annual growth rate over the last five years, higher than its 9.9% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, RadNet reported EPS at negative $0.35, down from $0.07 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects RadNet’s full-year EPS of $0.21 to grow 157%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

RadNet has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3%, subpar for a healthcare business.

Taking a step back, we can see that RadNet’s margin dropped by 3.9 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

RadNet burned through $7.35 million of cash in Q1, equivalent to a negative 1.6% margin. The company’s cash burn slowed from $40.32 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

RadNet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.4%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, RadNet’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

RadNet reported $717.3 million of cash and $1.75 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $267.4 million of EBITDA over the last 12 months, we view RadNet’s 3.8× net-debt-to-EBITDA ratio as safe. We also see its $92.15 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly RadNet blew past analysts’ revenue expectations this quarter. On the other hand, its EPS missed significantly. Overall, this print had some key positives. The stock traded up 1% to $57.65 immediately after reporting.

Updated: May 21, 2025 at 11:53 PM EDT

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

RadNet isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was good over the last five years, it’s expected to deteriorate over the next 12 months and its subscale operations give it fewer distribution channels than its larger rivals. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its cash profitability fell over the last five years.

RadNet’s P/E ratio based on the next 12 months is 109.8x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $72 on the company (compared to the current share price of $58).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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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