AI Spine Surgery And Personalized Implants Will Transform Long-Term Earnings Potential

Catalysts

About Carlsmed

Carlsmed provides a digital surgery platform and patient specific spine implants designed to improve alignment and reduce revision procedures.

What are the underlying business or industry changes driving this perspective?

• Growing adoption of AI supported preoperative planning in spine surgery, combined with Carlsmed's real world data and COMPASS registry outcomes, can support wider surgeon uptake and more procedures per surgeon over time, which directly affects revenue growth.
• Shifting preference toward personalized, data backed care and away from one size fits all implants positions Carlsmed's patient specific aprevo implants to capture a larger share of lumbar fusion procedures, with higher procedure volumes supporting earnings scalability.
• CMS reimbursement tailwinds, including the NTAP of up to US$21,125 per cervical inpatient procedure and anticipated outpatient transitional pass through payments, can support hospital adoption in both inpatient and outpatient settings, which is important for revenue and the path toward net income improvement.
• Capital light, make on demand manufacturing with an 8 business day lead time and lower expedite fees supports high gross margins in the mid 70% range, which, if maintained at higher scale, can improve operating leverage and narrow net losses.
• Expansion from lumbar into cervical fusion using the same digital platform and existing sales force, alongside strong early clinical feedback from over 50 cervical procedures, can add a second major revenue stream without a proportional increase in fixed costs, which is supportive of margin and earnings efficiency.

Assumptions

This narrative explores a more optimistic perspective on Carlsmed compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Carlsmed's revenue will grow by 48.1% annually over the next 3 years.
• The bullish analysts are not forecasting that Carlsmed will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Carlsmed's profit margin will increase from -58.8% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Carlsmed's profit margin were to converge on the industry average, you could expect earnings to reach $18.8 million (and earnings per share of $0.58) by about January 2029, up from $-26.3 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 52.1x on those 2029 earnings, up from -13.4x today. This future PE is greater than the current PE for the US Medical Equipment industry at 32.0x.
• The bullish 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 7.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Carlsmed is still reporting GAAP net losses, with a loss of $8.5 million in Q3 2025 and negative EBITDA of $8.2 million, and cash used in operating activities of $23.7 million in the first 9 months of 2025. If operating leverage from the digital and make on demand model does not materialize as expected, ongoing cash burn could pressure funding needs and weigh on earnings and net margins over time.
• The business model relies heavily on rapid surgeon adoption and utilization, and management repeatedly highlights growth in surgeon users as the main driver of revenue. If surgeon enthusiasm slows, if training takes longer than planned, or if competing technologies and implants gain share, procedure volumes could fall short of expectations and affect revenue and earnings scalability.
• A key pillar of the Carlsmed story is reimbursement support, including the current NTAP of up to US$21,125 for cervical inpatient procedures and anticipated outpatient transitional pass through payments in early 2026. If reimbursement decisions change, are delayed, or are less favorable than anticipated, hospitals may adopt more slowly and this could pressure revenue growth and net margins.
• Carlsmed emphasizes long term clinical differentiation based on reduced revision and reoperation rates using relatively early data sets, such as 329 patients with more than 1 year of follow up and 170 with more than 2 years. If larger or longer term studies do not confirm these outcomes, or if real world data in broader use is less favorable, hospitals and surgeons may be less willing to switch from established spine procedures, affecting revenue and pricing power.
• The company is expanding operating expenses quickly, with total operating expenses of $19.0 million in Q3 2025 compared with $12.6 million in Q3 2024, including higher sales and marketing, R&D and general and administrative costs related to being a public company. If future revenue does not keep pace with this higher fixed cost base, net losses could persist for longer and delay any improvement in net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Carlsmed is $24.0, which represents up to two standard deviations above the consensus price target of $19.4. This valuation is based on what can be assumed as the expectations of Carlsmed's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $145.5 million, earnings will come to $18.8 million, and it would be trading on a PE ratio of 52.1x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $13.25, the analyst price target of $24.0 is 44.8% 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.