The hearing-loss market is concentrated with a few companies pulling the strings. In the sub-segment of severe to profound hearing loss, the Australian company Cochlear Ltd. is the undisputed leader with a market share of more than 60%. Between 2005 and 2024, the stock 14-bagged, generating stellar returns for shareholders. Since then, however, shares dropped 50% in just two years, culminating in a 20% washout in one day after the recent results. A bit surprising for a dominating leader operating in a stable market with rising demand. Is the stock a crystal-clear opportunity or why the deafening silence from buyers?
Summary and key takeaways from today’s Weekly
– Hearing loss is not only unpleasant, but unfortunately a serious and growing limitation.
– In the niche of severe to profound hearing loss, Australian company Cochlear Ltd. has a market share of 60%.
– It stock collapsed, despite vast potential — I spot a few good reasons and tell you why I prefer a different idea.
Hearing loss is a very unpleasant condition that unfortunately is on the rise.
The reasons for hearing loss are manifold and stem from an overall aging population facing a natural decline in the ability to hear, louder environments, more stress, and listening to loud music (concerts, but also especially headphones).
What many people don’t know is that hearing aids only work up to a certain threshold.
Higher levels of hearing loss are classified as “severe”, and beyond that, “profound”. Once reached, traditional hearing aids that just amplify outside frequencies become ineffective. What is then needed are cochlear implants. They work differently, as they do not just tune up the volume, but they stimulate the hearing nerve and help transforming sound waves into electrical signals for the brain.
Here, Cochlear Ltd. (ISIN: AU000000COH5, ticker: COH) is the boss.
More than 60% market share in a structurally growing market is not something many companies can claim to operate in.
Yet, COH stock lost severely (or profoundly) from its all-time high, set in early 2024. COH is down almost 50% and it got hammered after the release of the last half-year results, dropping around 20% in a single session. The company has no debt problems, is highly profitable, and the market itself is still vastly under-penetrated.
Is COH tuned for a turnaround?
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Discounted market dominator — or serious shockwaves?
Hearing works like this: external sound is captured by the outer ear from where it travels through the ear canal. At the end of the tunnel, the sound reaches and vibrates the eardrum, and later the cochlea (without “r”), a sensitive spiral structure, shown in purple below, which transforms physical waves into impulses.
These processed signals go through a hearing nerve straight into the brain.
Severe to profound hearing loss often results from damage to the cochlea (or parts of it), disrupting its ability to process sound.
Traditional hearing aids, which basically are sound amplifiers, reach their limits as they cannot repair the damage or bypass the cochlea to stimulate the nerve directly.
Hearing loss often causes severe side effects like increased risk of dementia (greatest risk factor) and higher risk of falling and breaking bones or more severe conditions, requiring hospital stay. If not even something worse. Also, potential depression, social isolation, higher and growing healthcare costs, reduced income potential, and relationship strain leave their footprints.
Something more potent is needed.
This is where cochlear implants (CI) come into play.
Technically speaking, these are partially implanted CI, as most of the apparatus is worn visibly on the outside. The sound-capturing sensor is magnetically attached to the skull, while the battery is hanging on or around the ear. From there, the wiring is implanted into the ear to stimulate the nerve, bypassing the cochlea.
On the slide below, you can see these devices (red arrows are mine). Maybe you have seen someone wearing a CI on the street. Personally, I have maybe seen a handful of people max, as this is still a niche with many untreated people.
In this niche, Cochlear Ltd. is the dominator with a market share of some 60%.
The company is also selling traditional hearing aids (where it is not leading), but CI is where it excels. Founded in the early 1980s, Cochlear has been providing this hearing solution to people in need. The company says it has sold more than 750k such devices to provide people hear with one, sometimes even two implants (one per ear).
Cochlear describes itself as the pioneer in this area.
So fine, so good.
Long-term, the company has shown solid results, with sales and operating earnings trending up. Obviously, there was a brief disruption during the lockdowns, postponing some implantations. But this was indeed just a brief interruption, with business results grinding higher again since.
Temporarily, even at a higher pace.
The top line has been growing in a range of 5–10% over the last decade.
Post 2020, inflation has added some pricing effects for overall higher growth than before.
Demand and sales can sometimes fluctuate when reimbursement and cost coverage are negotiated or new, upgraded models get introduced. Besides selling CI, the company is also providing after-sales services like battery or part replacements.
But generally, this is a modestly growing market with strucural tailwinds and rather little cyclicality. I am deliberately saying “rather”, because the latest results were the weakest for the last decade, warranting some caution — more on that soon.
Until here, an aging population is facing a higher likelihood to suffer from some form of hearing loss, especially after the age of 70. In total, this is a lucrative and strongly profitable business with what it looks like a wave of aging boomers, mainly in western countries, becoming potential clients.
Gross margins north of 70% and operating margins of more than 20% show high, and especially relatively consistent profitability.
The balance sheet is crystal-clear with no financial debt, so “check” at this point:
COH generates solid cash flow — on the surface.
We can see that both, operating and free cash flow, have been trending higher over the years. FY2020 was the exception due to the known disruptions.
More recently, however, cash generation weakened somewhat, which leads us to the latest results.
A month ago, the company reported truly disappointing half-year figures.
Sales in constant currency fell 2%, while the bottom line dropped even 9%. The dividend was not raised, but only kept flat. This is noticeably below the mid- to high-single digit growth we have seen historically.
Management cited temporary and solvable issues as reasons for the weak performance. Reimbursement negotiations and product registrations are ongoing, while new upgraded models are ready to be launched, requiring some prep-work.
This in itself sounds credible and solvable, more a timing issue.
But this does not explain why cash flow has barely moved since 2017, showing at best only anemic growth. Looking closer, we can see that cash flow has been falling from the high for a few years, not just in this fiscal period.
Further, the ongoing cost of living crisis is holding back some patients from buying a CI. These devices cost five-figure sums — per ear. If not covered and reimbursed, this is a high expense. Cochlear has conducted some pricing in the past.
Management’s expectation that the second fiscal half (until 30 June 2026) will be stronger, might be doubtful in light of this. But even if I am wrong here, and the slowdown turns out to be just a timing issue, there’s something more high-level that should be understood.
CI devices come with certain disadvantages, limiting widespread adoption.
Traditional CIs are bulky, impractical devices in everyday life.
Many qualified patients do not want to wear an externally visible, bulky and wired sensor-battery combo that tells everybody about their disability. Besides this shame factor, CI use microphones (do not use the ear’s anatomy fully) and magnets (prone to defects, can drop off, no MRI scans or headphones possible, etc.). The latter is implanted into the head to hold the sensor on the outside.
But that’s not all.
- Batteries need to be charged on a daily basis — if they disconnect at the wrong moment, patients stand on the street and stop hearing
- CI need to be taken off for showering, swimming, and sleeping — taking hearing ability off, too
- sweating in the summer can make the magnets drop off
In my view, without being an MD, just using common sense, this sounds like a rather limited solution. And herein lies the biggest bear thesis according to my research.
COH stock is still valued at a relatively high 5x sales.
Admittedly, that’s much better than the previous double-digit figure at the highs.
But this is still far from low, as the free cash flow multiple shows.
Ignoring the disruption-affected spikes in 2020 and 2021, we can see that COH traded most of the time for a FCF multiple of more than 40x, even 50–60x for some time.
This was just insane, but being such a dominant market leader, might offer some sort of an explanation for this big premium — even though, I can only shake my head.
Anyway, we are still talking about a multiple of 30x.
If COH does not return to significantly better operating performance with higher growth dynamics — and stronger cash generation — even after being down almost 50%, the stock could be much too expensive, still.
And honestly, my longer-time readers know that I am not a chartist, but the recent collapse does not look healthy at all.
Could there be a more deeply-rooted reason for this?
My personal take is — yes, indeed.
There’s a small company that’s working on a solution, solving most of the CI issues.
Covered by plenty of patents worldwide (with more frequently being added), having developed a workaround enabling “invisible hearing” (no visible apparatus), and having positive feedback from implanted patients using this novel solution for a few years, chances are good the ongoing clinical trial will be a success.
A leading doctor who inserts these implants said that there were many more patients interested in the trials that spots were available. And for those who could participate, no big convincing effort was necessary — mainly for the huge advantages.
Two weeks ago, I’ve sent my latest exclusive report to my Premium PLUS members, covering exactly this idea.
This company has the potential to truly disrupt the CI market, where Cochlear Ltd. is both, dominating, but also not being able to reach most qualified patients, for the discussed negatives.
My pick has already one approved product on the market. The new solution is building on it.
The company is fully financed and it has a strong backer.
Everything you need to know — in my latest report for Premium PLUS members (click the screenshot to sign up in < 2 mins) —>
As I wrote in my report, the market penetration (among people who qualify for CI), is low with an estimated only 5–8%.
If successful, my pick could disrupt, and more importantly, expand an incumbent market, where according to the doctor no real needle-moving developments have been achieved over the last four decades.
Now could be the time.
Don’t put a deaf ear on this company and its stock — that could send shockwaves through the industry.
Conclusion
Hearing loss is not only unpleasant, but unfortunately a serious and growing limitation.
In the niche of severe to profound hearing loss, Australian company Cochlear Ltd. has a market share of 60%.
It stock collapsed, despite vast potential — I spot a few good reasons and tell you why I prefer a different idea.
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