2.4.26 – Veralto Corporation (VLTO) $90 — Veralto is a global leader in essential water and product quality solutions focusing on safeguarding vital resources. The company has a $23B TEV, $5.5B in revenues in 2025, 25% EBITDA margins, 17% FCF margins, net debt/EBITDA at ~0.8x, and a small dividend yield (0.3%).
Catalyst for report: Q4 earnings report and stock action. Organic growth was lower at 1.7% and forward organic growth was below 2025 results of 4.7%. Q4 EPS was above guidance but forward earnings guidance shows only ~6% growth at the midpoint. Management has increased guidance sequentially on every call the last two years. During 2024, the stock traded over 30x P/E, and with the business having achieved what management forecast, the multiple has compressed to about 21x. Based on its defensive nature and LSD-MSD growth, Veralto can be a top ~10-20 position versus the less than 1% in accounts. The AI risk requires more research.
Valuation: 2026E - 21x P/E, 16x EBITDA, 22x FCF. 20x FCF is an $82 stock.
Investment thesis:
Veralto provides mission critical products to enable the value chains in both water and CPG products. Their razor/razor blade model should drive steady 3% to 5% organic growth.
Water Scarcity: As fresh water becomes scarcer, industrial users must invest in Veralto’s filtration and recycling technologies (Trojan Technologies) to reuse water.
Regulations: EPA and EU standards for "Forever Chemicals" (PFAS) and wastewater discharge create a mandatory demand for Veralto’s testing equipment. A loose regulatory environment in the U.S. is not positive for Veralto.
The company has a capex light (1%+ of revenues) manufacturing model and disciplined management culture based on the Danaher Business System. Management will increment growth through acquisitions ($435 million deal for In-Situ in water monitoring just completed) and increase margins (+20bps in 2025, +25bps forecast in 2026).
Earnings and free cash flow can grow at a high-single digit rate and drive improvement in (ROC/ROE) and (EVA). GAAP FCF ROC was 17.5% in 2025, which is strong. The wildcard is the extent of acquisition dollars.
Risks: China is about 10% of revenues and has been a drag on the business (slowdown in Chinese municipal infrastructure spending). Growth came in at just 1.7% for Q4 and some of Veralto’s end markets are slow/slowing. Veralto has many sensors in its water and product quality segments that are connected to the cloud and a cybersecurity breach in a municipal water system or pharma packaging line would be a problem. AI risks?
Veralto can trade at 20x $4.75 in 2027 for a $95 stock. The stock has been expensive for ~2 years and is trading down to a more reasonable multiple. I think earnings guidance for 2026 is conservative and the business will do $4.30+. A point to get aggressive on buying is in the low $80’s.
Overview: Despite the valuation, we’ve continued to own the stock based on its leading niche positions, relatively defensive business model at 60%+ of revenues from consumables/recurring sources, a predictable low-single digit to mid-single-digit organic growth profile, strong profit metrics, and a solid management team with Danaher pedigree. We track about 13 companies within the overall business with the most important being Hach (~25% of total revenues, water quality instruments and consumables), Videojet (~22%, product marking), and Chemtreat (15%, water treatment—competes with Ecolab).
AI: Does Veralto have AI risk? I will pursue this question further, while below are some initial thoughts. AI will enhance its hardware product sets, but there could be margin risk from new competition given how high a margin profile (~25%) both segments have. The most obvious areas of risk are about 12% of revenues, and are the recurring software businesses.
Esko (Packaging Software), ~6% of revenues. Esko is the global leader in packaging prepress and workflow software. Traditionally, creating a dozen SKU variations for a global brand required specialized human labor and Esko's complex tools. Today, Generative AI can automate 80% of these layout and resizing tasks instantly. While Esko has launched its own "Packaging Intelligence" layer to combat this, there is a risk that CPG companies will shift toward cheaper, AI-native design platforms, pressuring Esko’s high-margin software licenses. One of Esko's moats is regulatory compliance (ensuring ingredient labels are legal). New AI-powered legal-tech startups are emerging that can scan and verify label compliance using general LLMs, potentially bypassing the need for Esko's specialized Comply modules.
X-Rite & Pantone (Color Management), 6% of revenues. These businesses define color standards for global brands (ensuring a Coca-Cola red looks the same in Tokyo as in New York). The risk here is that Digital Twins and AI-driven color matching could eventually reduce the need for physical color measurement instruments. If AI can perfectly simulate how an ink will look on a specific substrate under various lighting conditions, the demand for X-Rite's high-end spectrophotometers (hardware) could soften. As AI design tools become the default, there is a long-term risk that these tools will create their own "universal" open-source color libraries, potentially challenging the proprietary "Pantone Matching System" that Veralto monetizes through licensing.
2.2.26 – Revvity (RVTY) - $103. Revvity provides products and services to the biopharma and diagnostics markets. The company has $2.8B (2025) in revenues and manufactures reagents, instruments and software (50% of revenues) and immunodiagnostics (30%) and reproductive health assays (20%) for a global customer base. In summary form, I review the overall business, highlight the AI opportunity, and focus on their Signals software business (~$224M million revenues) and its new revenue model, which is similar to the analysis of the other software businesses we continue to evaluate (Autodesk to Roper, etc.).
Investment thesis:
Innovation in the life sciences market will enable ~3%-5% industry growth from 2026 to 2028.
Revvity has leading niche positions, which provide the ability to grow 1% to 2% faster than the market.
Management expects to increase operating margins from ~27% in 2025 to the mid-30s% over time.
Earnings and free cash flow can grow at a high-single digit rate and drive improvement in balance sheet return (ROC/ROE) and economic value added (EVA).
Risks: Competitive industry with large players. Negative issues in the academic/government base (~15%+). China had been 20%+ of revenues and is now ~15%+.
EVA will improve, earnings will grow, and the stock can trade at 20x ~$6.25 in 2028 = $125 stock. We own a lot of life science companies and this is the weakest in some regards.
Overview: Revvity has a $14.5B TEV, had 3% organic growth in 2025, forecasts 2-3% for 2026, and we should expect mid-single digit growth as a long-term range. Management targets 6-8% annual growth in their long-range plan. Earnings can grow at a high-single digit rate. In addition to Signals, its leading franchises include:
BioLegend is a dominant provider of reagents for flow cytometry and multi-omic analyses (TotalSeq)
World leader in newborn screening and its technologies test over 40 million babies annually.
ChemDraw is the global standard for chemical structure drawing. If you are a chemist, you use ChemDraw.
Leading high-throughput plate readers for sensitivity screening. The EnVision platform is a lab standard.
Pin-point s a leader in the next wave of CRISPR gene base editing technology.
Valuation: 20x P/E, 16x EBITDA, 23x FCF. Ten-year averages: 21x P/E, 17.5x EBITDA, 25x FCF.
EVA has been negative the last few years due to the $5.25B acquisition of BioLegend and a dramatic decline in growth following the COVID boom. GAAP ROC/ROE metrics are very low (~3%) due to ~20 years of continued divestitures (divested $1.3B in revenues for $2.45B in 2023) and acquisitions as the business has changed dramatically over time. The acquisition of BioLegend (consumable research reagents) in 2021 at ~13x revenues at the top of the life sciences cycle has hurt balance sheet return metrics. Net debt/EBITDA is 2.7x. The dividend yield is low at 0.3%. GAAP returns will increase the next few years—perhaps as much as 50% from FCF ROC of 4.9% in 2025 to ~7%+ in 2028.
AI: Revvity is embedding AI across four primary domains: Drug Discovery, Clinical Diagnostics, Genomic Engineering, and Lab Operations.
Drug discovery: The flagship AI initiative is Signals Xynthetica, launched in early 2026 as a Models-as-a-Service (MaaS) platform. Among its capabilities are using LLMs and diffusion models to propose new molecules that meet specific design constraints.
Clinical Diagnostics & Imaging: Revvity is using AI to automate the interpretation phase of diagnostics, which has historically been a manual bottleneck.
Genomic Engineering (Pin-point Base Editing): Revvity has integrated AI into its gene-editing suite to make CRISPR-based therapies safer and more precise.
Intelligent Lab Operations: Beyond the science, Revvity is adding administrative AI to help labs run more efficiently. An LLM-based tool that can automatically generate summaries of Standard Operating Procedures (SOPs), scientific literature, and experimental notes.
Signals Software - The Signals software business is the digital core of Revvity’s Life Sciences segment. It provides an integrated informatics platform that spans the entire drug discovery lifecycle—from initial chemical drawing and lab notes to clinical trial analytics and AI-driven molecular design. The software business grew in the high teens organically in 2025, though growth was flat in Q4, which relates to renewal timing. Management has discussed the shift from a traditional software provider to a SaaS-first and AI-augmented ecosystem. A key driver has been the transition to a cloud-based model. The business had nearly 40% growth in annual recurring revenue (ARR) year-over-year. As discussed today, net revenue retention (NRR) is about 110%, which is strong.
As with many (all?) software companies, the revenue model is now evolving. The company launched Signals Xynthetica recently, which is an AI "Models-as-a-Service" (MaaS) platform, which represents a high-value revenue stream focused on generative molecular design and with a new pricing model: a modeling credit system.
Consumption-Based Model: Instead of a flat fee for unlimited use, users purchase or are allocated credits. These are spent when running complex in-silico designs, such as de novo molecule generation, property prediction, or multi-objective optimization.
In a significant move to drive adoption, Eli Lilly and Revvity announced this past month that they will jointly fund modeling credits for selected small and mid-sized biotech participants. This allows smaller firms to access Lilly's TUNE Lab predictive models without high upfront costs, in exchange for contributing data back to the federated learning loop.
Tiered Entitlements: Like the Signals Notebook Standard Edition (which is priced around $1,325 per user/year), Xynthetica modeling credits are typically bundled into an annual contract. If a lab exceeds its specified quantity of use, they must purchase additional credit top-ups.
Management noted the burn rate of credits depends on the computational intensity of the task:
High-Cost Tasks: De novo generation of entirely new chemical scaffolds or complex 3D protein-ligand docking simulations.
Low-Cost Tasks: Basic property predictions like estimating solubility or toxicity for known molecules.
By using credits, Revvity is shifting away from the per-seat limitations that are currently pressuring software companies. This outcome-based pricing may enable Revvity to capture more revenue as a lab's AI usage increases, directly correlating their software growth to the volume of R&D activity.
It is difficult to understand whether the actual revenue dollars to Revvity will be higher or lower in this model than with the prior seat-based model. While investors and analysts aren’t talking about it in this way, this is actually a back to the future strategy and “pay as you go,” which is a transaction-based model. For years, investors preferred companies that were moving to subscriptions over transactional models. In this case, it is different as the Revvity will be able to monetize the intensity of the work rather than just the number of people doing it. In drug discovery, it is reasonably to conclude that if the AI systems are helpful, there will be a lot of intensity to the inferencing on new drug molecules, etc.
CEO Prahlad Singh believes Signals is "perfectly positioned to capitalize on AI." Revvity will be paid for the functional outcome (the AI prediction) rather than the access point (the seat). Revvity is betting the dollars generated per scientist will rise as those scientists become more productive using AI tools.
I am not so sure the consumption/outcomes model is better. My current view is it is worse financially to the company. I will continue to learn more.
Next steps:
Continue evaluation of Revvity overall and down to specifics.
Revvity versus other life science companies. Prefer DHR and TMO. TECH has a business comparable to BioLegend.
