Stryker (SYK)

Medical technology company Stryker (NYSE:SYK) announced better-than-expected revenue in Q1 CY2025, with sales up 11.9% year on year to $5.87 billion. Its non-GAAP profit of $2.84 per share was 4% above analysts’ consensus estimates.

Company Overview

With over 150 million patients impacted annually through its innovative healthcare technologies, Stryker (NYSE:SYK) develops and manufactures advanced medical devices and equipment across orthopedics, surgical tools, neurotechnology, and patient care solutions.

The medical devices industry operates a business model that balances steady demand with significant investments in innovation and regulatory compliance. The industry benefits from recurring revenue streams tied to consumables, maintenance services, and incremental upgrades to the latest technologies. However, the capital-intensive nature of product development, coupled with lengthy regulatory pathways and the need for clinical validation, can weigh on profitability and timelines. In addition, there are constant pricing pressures from healthcare systems and insurers maximizing cost efficiency. Over the next several years, one tailwind is demographic–aging populations means rising chronic disease rates that drive greater demand for medical interventions and monitoring solutions. Advances in digital health, such as remote patient monitoring and smart devices, are also expected to unlock new demand by shortening upgrade cycles. On the other hand, the industry faces headwinds from pricing and reimbursement pressures as healthcare providers increasingly adopt value-based care models. Additionally, the integration of cybersecurity for connected devices adds further risk and complexity for device manufacturers.

Stryker competes with several major medical technology companies, including Zimmer Biomet Holdings, Johnson & Johnson MedTech, Medtronic, and Smith & Nephew in orthopedics and surgical instruments. In neurotechnology, its competitors include Medtronic, Johnson & Johnson MedTech, Terumo Corporation, and Penumbra.

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 $23.22 billion in revenue over the past 12 months, Stryker sports economies of scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Stryker grew its sales at a decent 9.2% compounded annual growth rate. 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. Stryker’s annualized revenue growth of 10.7% over the last two years is above its five-year trend, suggesting some bright spots.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Stryker’s organic revenue averaged 10.4% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Stryker reported year-on-year revenue growth of 11.9%, and its $5.87 billion of revenue exceeded Wall Street’s estimates by 3.2%.

Looking ahead, sell-side analysts expect revenue to grow 7.5% over the next 12 months, a deceleration versus the last two years. We still think its growth trajectory is satisfactory given its scale and indicates the market is baking in success for its products and services.

Stryker has managed its cost base well over the last five years. It demonstrated solid profitability for a healthcare business, producing an average operating margin of 16.2%.

Analyzing the trend in its profitability, Stryker’s operating margin rose by 1.4 percentage points over the last five years, as its sales growth gave it operating leverage. Zooming into its more recent performance, however, we can see the company’s margin has decreased by 1.2 percentage points on a two-year basis. If Stryker wants to pass our bar, it must prove it can expand its profitability consistently.

This quarter, Stryker generated an operating profit margin of 14.3%, down 4.3 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

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.

Stryker’s solid 8.8% annual EPS growth over the last five years aligns with its revenue performance. This tells us its incremental sales were profitable.

In Q1, Stryker reported EPS at $2.84, up from $2.50 in the same quarter last year. This print beat analysts’ estimates by 4%. Over the next 12 months, Wall Street expects Stryker’s full-year EPS of $12.54 to grow 10.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Stryker has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 14.6% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Stryker’s margin dropped by 3 percentage points during that time. We’re willing to live with its performance for now but hope its cash conversion can rise soon. If its declines continue, it could signal increasing investment needs and capital intensity.

Stryker’s free cash flow clocked in at $127 million in Q1, equivalent to a 2.2% margin. This result was good as its margin was 1.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

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).

Stryker’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 9.4%, slightly better than typical healthcare business.

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. On average, Stryker’s ROIC increased by 3.2 percentage points annually over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Stryker reported $2.41 billion of cash and $15.94 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 $6.34 billion of EBITDA over the last 12 months, we view Stryker’s 2.1× net-debt-to-EBITDA ratio as safe. We also see its $293 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 enjoyed seeing Stryker beat analysts’ revenue expectations this quarter. We were also glad its organic revenue outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance slightly missed. Overall, this print was mixed. The stock remained flat at $372 immediately after reporting.

Updated: May 16, 2025 at 11:27 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Stryker.

Stryker is a fine business. To begin with, the its revenue growth was decent over the last five years, and analysts believe it can continue growing at these levels. And while its cash profitability fell over the last five years, its strong operating margins show it’s a well-run business. On top of that, its scale and strong customer awareness give it negotiating power.

Stryker’s P/E ratio based on the next 12 months is 28.5x. At this valuation, there’s a lot of good news priced in. Stryker is a good one to add to your watchlist - there are better investment opportunities out there at the moment.

Wall Street analysts have a consensus one-year price target of $423.98 on the company (compared to the current share price of $400).

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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