Masimo has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.4%. The stock now trades at $174.58, marking a 13.4% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Masimo, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Masimo Not Exciting?
We’re happy investors have made money, but we're swiping left on Masimo for now. Here are three reasons why MASI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Masimo grew its sales at a mediocre 6.2% compounded annual growth rate. This was below our standard for the healthcare sector.
2. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $1.48 billion in revenue over the past 12 months, Masimo is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Masimo’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Masimo isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 22.7× forward P/E (or $174.58 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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