Philips: Building a Digital Health Ecosystem

Philips is a global health technology company with a long legacy of innovation across imaging, monitoring, diagnostics, and personal health. As it refocuses its portfolio, streamlines operations, and deepens its push into digital health and recurring revenue, Philips is positioning itself as a more agile and resilient player in a growing industry. The question is: Does this healthcare innovator belong in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Philips at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Philips, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Koninklijke Philips N.V., founded in 1891, is a Dutch health technology company that has undergone a major transformation over the past decade. Once known for TVs, lighting, and household appliances, Philips has exited those categories to focus exclusively on healthcare. Today, its operations are organized around three segments: Diagnosis & Treatment, Connected Care, and Personal Health. These cover hospital-focused imaging and interventional solutions, patient monitoring and health informatics, and consumer wellness products such as electric toothbrushes and baby monitors. Philips operates in a healthcare landscape facing growing pressure - from aging populations and rising costs to chronic staff shortages and climate-related challenges. In this environment, the company positions itself not just as a supplier of equipment, but as a long-term partner to health systems. It offers integrated platforms that combine hardware, software, data, and services to improve the quality and efficiency of care. This strategic focus lies at the core of Philips’ competitive advantage. Its moat is built on technological integration, clinical expertise, and long-standing customer relationships. Philips provides connected systems that support patients throughout their healthcare journey - from intensive care units and radiology departments to remote monitoring at home. These are not just stand-alone devices; they are part of broader platforms that link imaging, patient data, and workflow software to help clinicians diagnose and treat more effectively. Because these systems are deeply embedded in hospital infrastructure and depend on ongoing updates, service contracts, and informatics subscriptions, customers face high switching costs. Once installed, Philips becomes an integral part of the clinical workflow. The company also benefits from a large installed base and a reputation for innovation, with solutions like the Azurion platform for image-guided therapy and the helium-free BlueSeal MRI distinguishing its product lineup. Its decision to embed most R&D within its business units ensures that innovation stays closely aligned with clinical needs, which helps maintain trust with healthcare providers. At the same time, Philips continues to grow recurring revenue through services and software - supporting profitability while deepening customer engagement.

Management

Roy Jakobs serves as the CEO of Philips, a role he assumed in October 2022 after more than a decade with the company. He joined Philips in 2010 and has since held a range of senior leadership positions across multiple business units and geographies, including Head of Personal Health and Chief Business Leader of the Connected Care segment. His career at Philips has been marked by a focus on operational improvement, business transformation, and customer-centric innovation. Roy Jakobs holds two master’s degrees - one in Business Administration and another in Marketing. His leadership style is grounded in pragmatism and clarity. He describes himself as a realist and emphasizes the importance of setting a clear direction and creating a plan that is both understandable and actionable. He believes that strong execution - not bold promises - is what ultimately drives meaningful change, especially in a complex, regulated industry like healthcare technology. As CEO, Roy Jakobs is leading a broad transformation of Philips, aiming to simplify the organization, reduce complexity, and refocus resources on areas of highest strategic impact. His vision centers on creating sustainable value by concentrating on innovation in core businesses such as Image-Guided Therapy, Monitoring, and Ultrasound. In his own words: “We need to shift our resources from being spread too thin across a wide portfolio to a more focused approach on creating growth and value in our segments and markets.” He is also a firm believer in transparency and accountability - lessons that have taken on added importance in the wake of the Respironics recall. Under his leadership, Philips is doubling down on patient safety, supply chain resilience, and more agile operations, while maintaining its longstanding commitment to innovation and sustainability. Given his deep understanding of the company, clear strategic focus, and no-nonsense approach to execution, I believe Roy Jakobs is the right person to lead Philips through its current transition and into a more focused and resilient future.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year.  Looking at the numbers from Philips, they are very underwhelming. The company has only managed to deliver a ROIC above 10% in one of the past ten years. Philips’ historically low ROIC can be attributed to several factors, including difficulties integrating acquisitions, managing a broad and sometimes unfocused product portfolio, and operating in a highly competitive healthcare technology market. In 2020, Philips publicly committed to improving its financial performance, setting a target of achieving a mid-to-high-teens ROIC by 2025. However, that goal was severely disrupted in 2021, when the company announced a major recall of its Respironics sleep and respiratory care devices due to potential health risks linked to the degradation of sound abatement foam. The recall has had a major financial impact on Philips. The company had to set aside money to cover costs, fix the affected devices, and settle lawsuits. These expenses have hurt profits and made it harder for Philips to earn a good return on the money it has invested, which is why ROIC has dropped sharply - and even turned negative in some years. There are early signs of recovery. ROIC improved in 2024, reaching its highest level since the recall. While still far from the company’s original target, this uptick may be a first step toward regaining financial momentum and restoring investor confidence. If Philips can execute its strategy and maintain operational discipline, reaching a mid-teens ROIC over time is still within reach.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Philips reached a record-high equity level in 2021, but it has declined in the years since. The primary reasons are the financial impact of the large-scale Respironics device recall - which included large expenses to fix the recalled devices, pay legal claims, and set aside money for future costs - and weaker demand in some key markets, especially China, which affected sales and profitability. Philips has stated a goal of returning to equity growth from 2025 onwards, aiming for mid-single-digit increases over time. If that trajectory holds, 2025 could mark the first year of equity growth since 2021.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Philips has experienced one year of negative free cash flow, which was due to the Respironics recall. This event had a major financial impact, as the company had to set aside money to cover costs, repair affected devices, and settle legal claims. Since then, free cash flow has returned to positive territory, which is encouraging. However, in 2024, free cash flow fell to its lowest level since 2015. This decline was mainly driven by two large, one-off items: a payment related to a previous economic loss settlement and a partial insurance reimbursement tied to the Respironics recall. While free cash flow is expected to improve slightly in 2025, it will still be weighed down by a significant cash payout related to ongoing Respironics litigation in the U.S. These unusual expenses also contributed to the notably lower levered free cash flow margin in 2024. Philips is using its available free cash flow to pay down debt and continue its dividend. To balance shareholder returns with its cash needs, the company is offering investors the choice of receiving the dividend in cash or shares, with a cap of 50% in total cash payout. This approach helps preserve liquidity while maintaining the dividend. The longer-term goal is to return to fully cash-based dividends once the balance sheet is stronger. Although the current free cash flow yield is not as high as in past years, it still suggests that the shares may be trading at an attractive valuation. However, we’ll revisit valuation in more detail later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by earnings. Unfortunately, we can’t use the 2024 numbers for this calculation, as Philips reported a negative EPS. In fact, the company has had negative earnings since 2021. If we use the earnings from 2021 and compare them to today’s debt levels, Philips would need 10,6 years of earnings to pay off its debt. However, 2021 was also affected by the financial impact of the Respironics recall. Using 2020 earnings instead brings the ratio down to 6,5 years. Either way, the debt-to-earnings ratio remains well above the three-year threshold and is something that should be monitored closely. That said, it is encouraging to see that management is actively prioritizing debt reduction. Philips has made significant progress in deleveraging and has stated that a debt level of 1,8x EBITDA is considered healthy. If the company can maintain its current trajectory, its debt position should improve over time.

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Risks

The recall of Respironics devices represents one of the most serious and far-reaching risks Philips has faced in recent years. Since June 2021, the company has had to recall millions of sleep and respiratory care devices due to potential health risks linked to the breakdown of the sound abatement foam used in the machines. This issue has had financial, operational, legal, and reputational consequences - and those risks are ongoing. The recall has been very expensive for Philips. The company has had to spend large amounts of money to fix the faulty devices, deal with lawsuits, and meet regulatory requirements. In 2024 alone, Philips agreed to pay $1,1 billion in the U.S. to settle claims related to health monitoring and personal injuries. These costs have hurt the company’s profits, reduced the cash it has left over after expenses, and dragged down its returns on investment. On top of that, Philips has had to reorganize parts of the business to deal with the crisis, which has added even more costs. Regulatorily, Philips is operating under a consent decree with the U.S. Food and Drug Administration. Under the terms of this agreement, Philips Respironics is barred from selling new CPAP and BiPAP devices in the U.S. - its largest and most profitable market—until it satisfies a detailed set of corrective actions. This restriction not only limits near-term revenue but also delays any meaningful recovery in the Sleep & Respiratory Care business. While Philips can continue to sell devices in other markets, the absence of new U.S. sales is a major headwind. Reputationally, the recall has damaged trust among patients, healthcare providers, and regulators. Philips has acknowledged that the issue has hurt its brand, which could weaken customer loyalty and erode its competitive position - particularly in markets where reliability and patient safety are paramount. Although the company has committed to strengthening its quality and safety culture, rebuilding its reputation will take time.

The continued decline in China poses a significant risk for Philips due to the company’s large exposure in both the consumer and healthcare markets. China has historically been an important growth driver, particularly in the Personal Health and Diagnosis & Treatment segments. However, recent developments have made the business environment increasingly challenging. Consumer demand remains weak, with Philips reporting a double-digit decline in Personal Health sales in the region. Both “sell-out” (products leaving retailers’ shelves) and “sell-in” (shipments to retailers) have slowed, leading to inventory adjustments and reduced order volumes. This trend has continued into 2025, and the company does not expect a meaningful recovery in the near term. Given the significance of Personal Health within Philips’ China portfolio, this softness is having a notable impact on overall performance. The healthcare side is also under pressure. Hospital spending has slowed due to two main factors: the ongoing effects of anti-corruption campaigns in the healthcare system and delays in China’s National Renewal Program for upgrading medical equipment. The anti-corruption measures have made hospitals more cautious in their purchasing decisions, as administrators face greater oversight and fear of investigation. This has led to longer decision-making processes and fewer new equipment orders. At the same time, the slow implementation of the National Renewal Program - designed to modernize hospital infrastructure - means that planned upgrades and tenders are taking longer to materialize. For a company like Philips, which relies heavily on hospital orders for imaging and diagnostic systems, these delays create uncertainty and weaken short-term growth prospects in one of its key markets. Strategically, this uncertainty makes it difficult for Philips to plan and allocate resources effectively in one of its most important international markets. Financially, the slowdown in China is undermining efforts to restore profitability and improve margins, particularly as weakness in China offsets stronger results in other regions. Competitively, prolonged softness could allow domestic Chinese players to gain ground, eroding Philips’ market share over time.

The rise of effective obesity drugs - particularly GLP-1 medications introduced by companies like Novo Nordisk and Eli Lilly - presents a potential long-term risk for Philips, especially within its Sleep & Respiratory Care business. Obesity is a major risk factor for several chronic health conditions, including obstructive sleep apnea, a key market for Philips’s CPAP and BiPAP devices. Studies suggest that a significant portion of sleep apnea patients - up to 77% - are also obese. If obesity drugs continue to prove effective and become more widely used, especially as costs fall over time due to improved access and future generics, the number of patients suffering from obesity-related sleep apnea may decline. This could lead to a smaller pool of patients requiring the types of respiratory devices Philips produces, ultimately reducing demand for its products in this segment. While Philips management has acknowledged that obesity drugs may help reduce some sleep apnea cases, they’ve also pointed out that most patients typically have multiple comorbidities - such as heart failure, hypertension, or diabetes - which obesity drugs alone will not address. So, while these medications may lessen the burden of one contributing factor, they may not eliminate the need for respiratory treatment altogether. Still, the uncertainty around how quickly and widely these drugs will be adopted adds risk to Philips’s long-term outlook in sleep and respiratory care. If these treatments significantly change the landscape of chronic disease management, Philips may face pressure on one of its historically important growth areas.

Reasons to invest

Favorable global trends offer a compelling long-term tailwind for Philips, particularly given its strong positioning in health technology. The company operates in an industry where the structural demand for care is growing faster than the healthcare system's ability to supply it. Across the world, aging populations, the rise in chronic and complex diseases, and a growing number of patients are straining healthcare infrastructure. At the same time, costs are rising and staff shortages are becoming more severe. These pressures are creating strong demand for solutions that improve clinical outcomes, increase productivity, and shift care closer to the home - all areas where Philips has a strategic presence. Philips is well-positioned to meet this need through its imaging, monitoring, and informatics platforms, which help healthcare providers do more with less. The company’s focus on connecting devices, data, and diagnostics supports a shift toward more efficient and personalized care. As healthcare systems invest in digital tools and AI to manage rising complexity, Philips’s offerings become increasingly relevant. Beyond hospitals, there’s also a growing movement toward self-care and early intervention. Over 2,4 billion people globally suffer from conditions like sleep apnea, COPD, respiratory insufficiency, and insomnia. While not all of these patients require medical devices, the sheer scale of the unmet need represents a large and underpenetrated market for Philips. As diagnosis rates improve and awareness increases, this market has the potential to expand significantly. Two major trends are accelerating that expansion. First, consumer tech companies like Apple, Samsung, and Fitbit are bringing sleep health into the mainstream through wearables that track and screen for sleep-related disorders. These devices act as a gateway, helping more people identify potential issues and seek formal treatment. Second, pharmaceutical companies are also raising awareness of diseases linked to conditions like sleep apnea. Their outreach efforts are drawing more patients into the healthcare system, indirectly increasing demand for Philips’s sleep and respiratory care devices. In short, Philips is operating at the intersection of rising healthcare needs, digital transformation, and growing public awareness.

Philips’ ongoing shift toward leaner, more focused operations is a key reason to be optimistic about the company’s long-term potential. Under CEO Roy Jakobs, the company has committed to simplifying its structure, cutting inefficiencies, and concentrating resources on its most promising segments. This streamlining is already delivering results, with more than €1,7 billion in productivity savings achieved over the past two years. Encouraged by this progress, Philips has raised its 2023–2025 savings target from €2 billion to €2,5 billion. A leaner organization brings multiple benefits. It increases accountability, speeds up decision-making, and helps Philips respond more effectively to external challenges - such as inflation, geopolitical risks, and weak demand in key markets like China. These internal improvements have enabled the company to offset rising component costs and global supply chain disruptions. By cutting complexity, reducing functional overhead, and improving supply chain efficiency, Philips is better positioned to defend - and ultimately grow - its profit margins. This simplification also allows Philips to sharpen its strategic focus. The company is pruning underperforming parts of its portfolio and investing more heavily in high-margin segments where it holds strong competitive positions, including Image Guided Therapy, Monitoring, and Ultrasound. With 70% of its revenue now coming from leadership positions in high-margin markets, Philips is evolving into a more focused and scalable business with greater earnings potential. In short, Philips’ effort to become a leaner and simpler company is more than a cost-cutting initiative - it is a strategic transformation designed to improve margins, enhance focus, and create long-term value for shareholders.

Innovation is a key reason to consider Philips as a long-term investment. More than 50% of the company’s sales now come from new or upgraded products launched within the past three years - a clear sign that innovation is not just ongoing but commercially impactful. This continuous renewal of the product portfolio helps Philips stay relevant in a fast-evolving healthcare landscape and strengthens its competitive position. The company is actively introducing new solutions across its core segments. In medical imaging, for example, Philips recently received FDA clearance for the CT 5300 and launched the next-generation helium-free MRI scanner - the only one of its kind currently available globally. In Ultrasound, innovations such as the VM11 and Transcend platforms are already contributing to margin improvements, driven by strong adoption and premium positioning. Beyond hardware, Philips is making significant progress in health informatics and integrated diagnostic platforms. Its strategic partnerships with major healthcare providers reflect rising demand for cloud-connected, AI-enabled solutions. These collaborations are more than simple product sales - they embed Philips’ technology into clinical workflows, deepen customer relationships, and create opportunities for recurring software and service revenue. This shift is already visible in areas like patient monitoring, where long-term service contracts and technology-as-a-service models are becoming more common. These deals are typically larger, span multiple years, and provide more predictable margins - while also increasing switching costs and customer retention. Innovation is also strong on the consumer side. Philips has refreshed its Sonicare lineup with new mid-range models, offering more options for users and supporting both market expansion and margin strength in the Personal Health segment.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. Philips has had negative earnings in the past three years, so I chose to use an EPS of 0,73, which is from the year 2021. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 12,3% in the next five years, but I'm not as optimistic. Additionally, I have selected a projected future P/E ratio of 14, which is double the growth rate. This decision is based on Philips' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €4,97. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Philips at a price of €2,49 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.556, and capital expenditures were 317. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 222 in our calculations. The tax provision was 963. We have 934 outstanding shares. Hence, the calculation will be as follows: (1.556 – 222 + 963) / 934 x 10 = €24,59 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Philips' free cash flow per share at €1,33 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is €14,60.

Conclusion

I believe that Philips is an intriguing company with strong management. The company has built its moat on technological integration, clinical expertise, and long-standing customer relationships. It is recovering from a difficult period, and while ROIC has reached its highest level since the Respironics recall, it remains well below 10%. Free cash flow was impacted by two large, one-off items in 2024, and another significant outflow is expected in 2025 due to the ongoing recall-related litigation. The Respironics recall remains a major risk for Philips. It has resulted in substantial financial costs, regulatory restrictions in the U.S. - its largest market - and long-term reputational damage. The continued decline in China is another concern, as weak consumer demand and delayed hospital spending are weighing on one of Philips’ most important markets, limiting profitability and growth. Additionally, the rise of effective obesity drugs could reduce the number of patients with obesity-related sleep apnea, which may shrink demand for Philips’ respiratory devices over time. On the positive side, favorable global trends support the long-term investment case for Philips. Aging populations, rising healthcare demand, and staffing shortages are creating a need for more efficient, technology-driven care. With strengths in imaging, monitoring, and connected diagnostics, Philips is well-positioned to benefit from this shift - both in hospitals and through increased focus on self-care and sleep health. The company’s ongoing shift toward leaner, more focused operations is improving efficiency, lowering costs, and helping it respond more effectively to external challenges. By simplifying its structure and concentrating on high-margin segments, Philips is setting the stage for more sustainable growth. Its strong commitment to innovation is another key strength, with more than half of sales now coming from recently launched or upgraded products. Continuous portfolio renewal across imaging, diagnostics, and personal health is helping Philips build a more defensible market position and increase recurring revenues. While there are many things to like about Philips as it recovers from the Respironics recall, I believe there are still too many uncertainties. Combined with weak financial metrics and elevated debt levels, these risks mean that I will not be investing in Philips at this time.

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