AI for furry friends? Missed the turn, waiting for entry

Idexx (IDXX): best vet franchise now putting AI in exam rooms, re-accelerating through an industry slump, and then jumped 5% on earnings this week... wait for better entry

IDEXX Laboratories sells diagnostic machines to vet clinics and the test cartridges on an ongoing basis. Recurring revenue sits at 80% with retention runs in the high nineties. Returns on capital are near 50%. This is the type of business one should want to own for years, but at the right price.

Revenue compounded around 9% a year and earnings around 15% for two decades, straight through the financial crisis, the pandemic, the rate shock and a three-year slump in vet visits. The business has never had a down revenue year in this window.

The stock has been more challenged than the chart above since covid, despite the underlying moat and strength of the business being unchanged.

The disconnect is due to both pull forward of pet adoption rates during covid, and the fact that Americans have been taking pets to the vet slightly less often for three years. The fear has been this is a broken consumer story. Meanwhile the growth engine re-accelerated from 4.5% to above 10%. Visits now increasingly suggest testing, thus creating incremental growth not tied to visits.

Q2 this week was the cleanest result yet as visits got worse, falling 1.3%, yet core diagnostics grew 10.3% for the fifth straight beat. Guidance went up on every line.

The AI angle is not a chatbot, but a cytology analyzer that replaced the glass slide. It is a $15 cancer screen that finds lymphoma months before symptoms. It is software that writes the medical record while the vet talks. Nine thousand of those analyzers are in clinics eighteen months after launch. Ten thousand clinics order the cancer panel. Next week, at the 13 August investor day, a fifth undisclosed platform may get unveiled.

I did the full workup in late July with the stock at $559, hoping to get a shot 5-10% cheaper. It never quite got there, then earnings hit, and shares rose nicely, again. So the honest title of this note is the one at the top. The turn is visible in the numbers, and I partially missed it. Below the line is the complete work… the business, history, why the acceleration is structural, and what the AI stack is actually worth. Also included are my forecasts and scenarios, and a preview of what I expect at the investor day.