Delayed Procurement And OEM Reliance Will Test Margins But Improve

Key Takeaways

• Heavy dependence on a few large customers and unpredictable sales cycles create ongoing revenue volatility and concentration risk.
  
• Increased investment and acquisitions have pressured margins and profitability, with hospital budget constraints posing further challenges to sustainable growth.
  
• Overreliance on key partners, delayed institutional budgets, margin pressure, and slow synergy realization threaten future revenue growth and long-term profitability.

Catalysts

Develops and markets virtual reality simulators for evidence-based medical training in Europe, North and South America, Asia, and internationally.

• While the long-term demand for simulation-based medical education is supported by healthcare digitization and stricter proficiency requirements for surgeons, Surgical Science Sweden faces ongoing delays and lumpiness in hospital procurement cycles, especially in the US and China, which could continue to slow or unpredictably shift revenue recognition in future quarters.
  
• Despite rapid growth in the robotic-assisted surgery market and increasing partnerships with leading OEMs, the company's heavy reliance on a small number of major robotic surgery customers and the batch nature of license sales exposes revenue to significant quarter-to-quarter volatility and concentration risk, potentially making top-line growth less reliable in the medium term.
  
• The company is investing heavily in new products, global distribution, and integration of recently acquired businesses which, although potentially supportive of future margin expansion, has recently caused operating expenses to outpace revenue growth and has diluted gross margins-raising questions about how soon Surgical Science can return to double-digit profitability and higher earnings growth.
  
• Although simulation-based certification and ongoing professional development trends are expanding the addressable market, tightening hospital budgets and cost-saving pressures in key regions could force Surgical Science and its distributors to accept lower prices or margin-eroding discounts, hindering both revenue growth and margin improvement initiatives.
  
• Continued advancement in healthcare technology, including the integration of artificial intelligence and robotics, should reinforce the company's product positioning, but slow pace of revenue synergy realization from acquisitions and the risk of disruptive new entrants could challenge the company's ability to maintain its technological edge and premium pricing, ultimately restricting both future revenue and net margin expansion.

Surgical Science Sweden Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Surgical Science Sweden compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Surgical Science Sweden's revenue will grow by 16.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.8% today to 22.6% in 3 years time.
• The bearish analysts expect earnings to reach SEK 332.7 million (and earnings per share of SEK 6.52) by about August 2028, up from SEK 92.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 53.3x today. This future PE is lower than the current PE for the SE Medical Equipment industry at 50.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.55%, as per the Simply Wall St company report.

Surgical Science Sweden Future Earnings Per Share Growth

Risks

• Prolonged uncertainty and delays in hospital and institutional procurement budgets, especially in key markets like the US and China, may lead to longer sales cycles and more volatile close rates, which increases the risk of uneven or slower future revenue growth.
  
• Overreliance on a small number of major OEM partners, particularly Intuitive Surgical, exposes the company to significant revenue concentration risk; any reduction in orders, slower platform transitions, or lower renewal rates from these partners can have a substantial negative impact on overall top-line revenue.
  
• Declining gross margins driven by a lower share of high-margin license revenue, weaker simulator sales, negative currency effects, and the inclusion of lower-margin businesses like Intelligent Ultrasound could further erode overall profitability and net margins if not reversed in coming quarters.
  
• Rising tariffs, stronger local currencies, and macroeconomic headwinds have already negatively impacted recent financial performance and remain long-term risks that could persistently pressure net earnings unless successfully offset by sustained price increases or operational efficiencies.
  
• A slow pace of realizing anticipated revenue synergies from acquisitions, coupled with increasing operating expenses that have consistently outpaced top-line growth for multiple quarters, raises concerns about the company's ability to achieve its long-term margin targets based only on organic growth, which could weaken earnings potential if not addressed.

Valuation

• The assumed bearish price target for Surgical Science Sweden is SEK120.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Surgical Science Sweden's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK185.0, and the most bearish reporting a price target of just SEK120.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK1.5 billion, earnings will come to SEK332.7 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of SEK96.5, the bearish analyst price target of SEK120.0 is 19.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.