This Pet Healthcare Stock Is Booming – And It Still Looks Undervalued

IDEXX Labs is a cash-creating machine and a dominant player in an industry that just keeps getting bigger. Its stock could be the cat’s meow.

Maybe your portfolio isn’t your first thought when you see someone dressed in a sweater vest that matches the one their dog is wearing or pushing their tabby cat in a built-for-purpose stroller. But if it is, you might be onto a winning investing idea: these days, people increasingly treat their pets as members of the family. And IDEXX Laboratories has been making a big business out of meeting their most fundamental needs.

I’ve spent some time looking into this pet healthcare firm and its premium valuation. And I’ve discovered that it isn’t just another stock: it’s a cash-generating, high-return compounder at the center of a booming industry. And here’s the best part: despite its strengths, this stock looks undervalued right now.

Thesis

• IDEXX operates a highly recurring, subscription-like business model, particularly in its Companion Animal Group (CAG), which accounts for over 90% of its revenue. This model locks customers into the IDEXX ecosystem, resulting in high retention rates and predictable revenue streams.

• IDEXX has grown itsrevenue at an impressive 12% annually since 2017, far outpacing the average S&P 500 name. And it expects to maintain double-digit growth over the next five years, driven by rising pet ownership, increased veterinary care visits, and broader adoption of diagnostic tests. The pet health industry is resilient – even in economic downturns, folks prioritize healthcare for their animals, ensuring stable demand for IDEXX’s products and services.

• IDEXX operates with an earnings before interest, tax, depreciation, and amortization (EBITDA) margin of over 30%, reflecting strong pricing power and some well-oiled operational efficiency. Over the past decade, margins have expanded by more than 50%, climbing to 32.2% in 2024, from just 22.1% in 2014. That’s a spectacular achievement: a lot of high-growth companies sacrifice profitability for growth. IDEXX, on the other hand, has been scaling efficiently, shifting toward higher-margin services and software while continuing to reinvest in research and development.

• Then, of course, there’s the cherry on top: even with its strong fundamentals, IDEXX is actually undervalued relative to its intrinsic worth. A discounted cash flow (DCF) analysis suggests a target price of $692, indicating a potential 50% upside from current levels. And sure, its stock trades at a premium to the broader market, but its highly recurring revenue, dominant industry position, and expanding profitability justify its valuation – and the current discount presents an attractive entry point for long-term investors.

Risks

• Despite being the market leader in veterinary diagnostics, the firm has got competition. Rivals Zoetis, Heska (now part of Mars), and Antech Diagnostics continue to invest in new technology and expand their offerings. Any little advancement in diagnostic solutions, aggressive new pricing strategy, or shift in customer preferences could potentially put pressure on IDEXX’s market share and profitability.

• The cold hard truth is that vet care is largely a nice-to-have, “discretionary” expense, and economic downturns generally lead pet owners to skip non-essential visits or opt for lower-cost alternatives. That makes diagnostic animal testing a semi-cyclical business: financial constraints will dent its demand, particularly in emerging markets or regions with lower pet insurance adoption.

• This industry is regulated, so changes in government policies, approval requirements, or compliance standards could result in unexpected costs or hangups.

• IDEXX trades at a lofty valuation compared to the broader market. Its high growth and profitability do justify this premium (for now, at least), but any slowdown in revenue growth or margin expansion could lead to a hefty re-rating of its stock price.