Regulation And Tariffs Will Hinder Digital Health Yet Spur Recovery

Key Takeaways

• Regulatory and demographic headwinds may constrain market growth, pressure margins, and increase compliance costs for pediatric monitoring products.
  
• Competitive threats and consumer skepticism could limit recurring revenues, despite innovation, product adoption, and efforts to expand reimbursement streams.
  
• Reliance on high-tariff manufacturing, slow healthcare adoption, and heavy operating costs threaten profitability, while reliance on core markets risks long-term revenue if diversification lags.

Catalysts

Provides digital parenting solutions in the United States, the United Kingdom, and internationally.

• While the company's strong year-over-year revenue growth and expanded gross margins reflect increasing consumer acceptance of digital health and remote monitoring, persistent global regulatory scrutiny-especially concerning infant health data-could lead to higher compliance costs or delayed product rollouts, potentially weighing on future revenue and profitability.
  
• Although Owlet is seeing rising international sell-through and market share gains, lower birth rates in developed countries remain a long-term demographic headwind that could constrain the addressable market for pediatric monitoring solutions, placing structural limits on sustained topline growth over time.
  
• Even as there is robust momentum in the subscription model and adoption of services like Owlet360, heightened consumer skepticism about digital health efficacy and potential device accuracy controversies could challenge the company's ability to maintain high attach rates and customer retention, ultimately pressuring recurring revenues and margins.
  
• While initial moves towards insurance reimbursement and deeper clinical integration signal an opportunity for new reimbursement streams and improved gross margin, slow progress with hospital adoption, complex integration cycles, and high R&D and legal costs may delay the shift to high-margin medical revenues, prolonging the path to meaningful earnings expansion.
  
• Despite continued innovation and the expansion of a comprehensive product ecosystem, intensifying competition from larger healthtech and consumer electronics firms could squeeze Owlet's pricing power and erode market share, threatening both future revenue growth and margin improvement.

Owlet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Owlet compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Owlet's revenue will grow by 18.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Owlet will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Owlet's profit margin will increase from -52.2% to the average US Medical Equipment industry of 12.4% in 3 years.
• If Owlet's profit margin were to converge on the industry average, you could expect earnings to reach $18.4 million (and earnings per share of $0.92) by about August 2028, up from $-46.9 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 15.0x on those 2028 earnings, up from -2.8x today. This future PE is lower than the current PE for the US Medical Equipment industry at 27.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Owlet Future Earnings Per Share Growth

Risks

• Persistent increases in tariffs on imports from Vietnam and Thailand, which have already risen to 19%–20%, are significantly impacting cost of goods sold and gross margin, with management guiding to a lower gross margin range of 46% to 50% for the full year, thus constraining profitability and cash flow.
  
• Slow progress and lengthy integration cycles in advancing the healthcare and insurance reimbursed channels, with hospital and healthcare system adoption of the Owlet Connect platform described as a slow, complex process, suggest long-term risk to achieving diversification beyond consumer channels and may delay meaningful impact on long-term revenue growth.
  
• Ongoing reliance on international manufacturing in high-tariff countries, while only beginning to evaluate diversification of sourcing, exposes Owlet to continuing risks associated with changing global trade policy and supply chain challenges, which could increase costs and pressure net margins for an extended period.
  
• Heavy and increasing operating expenses required to drive innovation, invest in infrastructure for subscription and telehealth offerings, and scale international business are likely to pressure net earnings, especially if revenue growth slows or if recurring revenue from subscriptions underperforms over the long-term.
  
• Dependence on ongoing and substantial growth in core U.S. and European consumer markets, both of which may be susceptible to long-term secular trends of declining birth rates and changing consumer attitudes, could lead to stagnating addressable market and risk long-term revenue and earnings growth if international or healthcare channels do not scale rapidly enough.

Valuation

• The assumed bearish price target for Owlet is $11.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Owlet'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 $15.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $147.9 million, earnings will come to $18.4 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $7.76, the bearish analyst price target of $11.0 is 29.5% 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.