We transfer coverage of Cochlear (ASX.COH), the leading cochlear implant manufacturer, with around 60% global market share. Developed markets are 80% of revenue, where it largely targets adults and seniors facing hearing loss.

The bottom line: We reiterate our $110 fair value estimate, a wide Morningstar Economic Moat, Capital Allocation of Exemplary, and an Uncertainty Rating of Medium. Shares are slightly undervalued, likely because we are more optimistic than the market about the resilience of cochlear implant demand.

Big picture: Cochlear implants are becoming more discretionary for adults and seniors due to cost-of-living pressures in the US and hospital capacity constraints in Europe. But with the new product, Nexa, now available in all jurisdictions, we expect rollout teething issues to ease.

  • This is likely from the second half of fiscal 2026 as hospital approval bottlenecks resolve and availability improves. Nexa is the world’s first smart cochlear implant system, with the convenience and capability to upgrade the sound processor remotely.

Key stats: We forecast 7% average revenue growth from fiscal 2027 versus guidance of about 4% in the second half of fiscal 2026, driven by Nexa uptake and penetration in emerging markets with faster birthrates and rising affordability.

  • We expect gross margins to be broadly flat at around 72% to midcycle. This sits below management’s long-term target of 75%. We expect overhead absorption to improve as volumes recover from current lows, but to be offset by greater mix shift to lower-priced emerging markets.
  • Our forecast midcycle NPAT margin is 14% versus an estimated 15% in fiscal 2026 and the firm’s long-term target of 18%. We expect margins to decrease slightly on higher investment in the adult and seniors segment and mix shift to lower-margin emerging markets.

Business strategy & outlook

Cochlear is the market leader in cochlear implants with a consistent share of roughly 60% across developed markets. Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. With this market segment largely penetrated, the company is looking elsewhere for growth with developed-market adults as the next primary focus and emerging-market children after that.

We estimate roughly 65% of units are sold to developed markets and the remaining 35% to emerging markets, where over 90% are for children. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. We estimate that average unit prices achieved in developed markets are roughly double those in emerging markets.

In the developed-market children segment, the growth tailwinds from increasing market penetration and the shift from single to bilateral implants over the last 15 years have played out, and we forecast growth in this segment to converge with the birthrate over time.

The adult developed market is more difficult to penetrate, and we expect the required investment to expand this segment will restrain significant operating margin expansion. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. The prevalence of profound hearing loss increases over 65 years and has a steep increase over 80 years of age. As such, an aging population and low penetration suggest a large opportunity. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to increase awareness and to fund research to support payer reimbursement. But we see two main challenges to accessing this market fully: first, the relatively low willingness of older candidates to undertake such invasive surgery, and second, the improvements in hearing aids. The hearing aid market is increasing its penetration in the severe hearing loss category, leaving only the smaller profound hearing loss as the cochlear implant niche.

Bulls say

  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnea.
  • The annuity-like revenue stream from sound processor upgrades and accessories is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of its cost of capital, a testament to the company’s high quality.

Bears say

  • Growth in the cochlear implant market is becoming more costly to achieve, limiting the potential upside to earnings.
  • The arrival of low-cost competitor Nurotron could disrupt markets other than China, triggering price deflation.
  • Growth in emerging markets such as China, India, and Latin America weighs on margins due to lower average prices.