Medical device manufacturers usually have the competitive advantage of high switching costs, leading to good business economics with reliable growth rates, good margins and low debt. Danish diagnostic and life-supporting devices maker Ambu A/S enjoys all of the above. Once the stock price exceeds any reasonable fair value estimate, however, no moat can save investors.
This is the lesson many Ambu shareholders are now having the displeasure to learn. The stock is trading near DKK 90 per share, down from DKK 359 four years ago, when it traded at 360 times earnings. In other words, investors were so optimistic about Ambu’s future, that they were willing to pay more than three and a half centuries worth of profits in advance for the stock. Of course, that type of exuberance couldn’t last.
But is Ambu cheap enough now, given that the fundamentals of the company haven’t really stopped improving and the stock is down 75% from its record? Unfortunately, we don’t think so. Management is guiding for roughly DKK 2 in free cash flow per share in 2025, giving the stock price the still-too-high multiple of 45. In addition, the Elliott Wave correction, which began in April, 2021, is far from over.
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Ambu stock surged from under DKK 1 in 2003 to nearly DKK 360 in 2021. That type of rapid advance makes everything prior to, say, 2015, almost invisible on a normal linear price chart. To gain a better perspective, we need to switch to a logarithmic price scale, where a 10% move in 2003 looks just as big as a 10% move today.
The weekly logarithmic chart above shows a very clear five-wave impulse pattern from the bottom in 2003 up. We’ve labeled it 1-2-3-4-5, where the a-b-c structure of wave 4 is also visible. According to the Elliott Wave theory, a three-wave correction follows every impulse. That’s what we think the post-2021 bear market in Ambu stock stands for.
The problem is that only waves A and B seem to be in place, which means that wave C down has yet to develop. It is supposed to breach the low of wave A, putting downside targets under DKK 60 on the table. Considering Ambu’s high valuation, we wouldn’t be surprised if it drops by another 50% or more, before the pre-2021 uptrend can finally resume. Those who bought above DKK 300 have little chance of breaking even anytime soon, if ever. Buying near the top of a bubble is a mistake Mr. Market rarely forgives.
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