Penumbra (PEN)

Medical device company Penumbra (NYSE:PEN) announced better-than-expected revenue in Q1 CY2025, with sales up 16.3% year on year to $324.1 million. The company expects the full year’s revenue to be around $1.35 billion, close to analysts’ estimates. Its non-GAAP profit of $0.83 per share was 24.4% above analysts’ consensus estimates.

Company Overview

Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE:PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.

The medical devices and supplies industry, particularly in the fields of cardiology, neurology, and vascular care, benefits from a business model that balances innovation with relatively predictable revenue streams. These companies focus on developing life-saving devices such as stents, pacemakers, neurostimulation implants, and vascular access tools, which address critical and often chronic conditions. The recurring need for these devices, coupled with growing global demand for advanced treatments, provides stability and opportunities for long-term growth. However, the industry faces hurdles such as high research and development costs, rigorous regulatory approval processes, and reliance on reimbursement from healthcare systems, which can exert downward pressure on pricing. Looking ahead, the industry is positioned to benefit from tailwinds such as aging populations (which tend to have higher rates of disease) and technological advancements like minimally invasive procedures and connected devices that improve patient monitoring and outcomes. Innovations in robotic-assisted surgery and AI-driven diagnostics are also expected to accelerate adoption and expand treatment capabilities. However, potential headwinds include pricing pressures stemming from value-based care models and continued complexity changing from navigating regulatory frameworks that may prioritize further lowering healthcare costs.

Penumbra competes with several large medical device manufacturers including Boston Scientific (NYSE:BSX), Medtronic (NYSE:MDT), and Stryker (NYSE:SYK), as well as specialized companies like Inari Medical (NASDAQ:NARI) in the thrombectomy space and Terumo Corporation (OTC:TRUMY) in vascular devices.

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 $1.24 billion in revenue over the past 12 months, Penumbra 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, Penumbra’s 17.4% annualized revenue growth over the last five years was impressive. Its growth beat the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Penumbra’s annualized revenue growth of 18.4% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 18.5% year-on-year growth. Because this number aligns with its normal revenue growth, we can see that Penumbra has properly hedged its foreign currency exposure.

This quarter, Penumbra reported year-on-year revenue growth of 16.3%, and its $324.1 million of revenue exceeded Wall Street’s estimates by 2.7%.

Looking ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, a deceleration versus the last two years. Still, this projection is admirable and suggests 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.

Penumbra was profitable over the last five years but held back by its large cost base. Its average operating margin of 1.8% was weak for a healthcare business.

On the plus side, Penumbra’s operating margin rose by 7.4 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its past improvements as the company’s margin was relatively unchanged on two-year basis.

In Q1, Penumbra generated an operating profit margin of 12.4%, up 8.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

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.

Penumbra’s EPS grew at an astounding 34.5% compounded annual growth rate over the last five years, higher than its 17.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Penumbra’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Penumbra’s operating margin expanded by 7.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Penumbra reported EPS at $0.83, up from $0.41 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Penumbra’s full-year EPS of $3.29 to grow 21.7%.

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.

Penumbra 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 2.4%, subpar for a healthcare business.

Taking a step back, an encouraging sign is that Penumbra’s margin expanded by 22.5 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Penumbra’s five-year average ROIC was negative 1.2%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.

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. Over the last few years, Penumbra’s ROIC has increased. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Penumbra is a well-capitalized company with $378.8 million of cash and $220.7 million of debt on its balance sheet. This $158.2 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Penumbra blew past analysts’ constant currency revenue expectations this quarter. We were also glad its EPS and EBITDA outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 5.4% to $293.55 immediately following the results.

Updated: May 22, 2025 at 11:25 PM EDT

Before investing in or passing on Penumbra, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Penumbra has a few positive attributes, but it doesn’t top our wishlist. To kick things off, its revenue growth was impressive over the last five years. And while Penumbra’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its rising cash profitability gives it more optionality.

Penumbra’s P/E ratio based on the next 12 months is 66.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $318.63 on the company (compared to the current share price of $266.75).

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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