Masimo currently trades at $171.97 per share and has shown little upside over the past six months, posting a middling return of 1.4%.
Is now the time to buy Masimo, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Masimo Will Underperform?
We're cautious about Masimo. Here are three reasons why you should be careful with MASI and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Patient Monitoring companies. This metric excludes currency movements, which are outside of Masimo’s control and are not indicative of underlying demand.
Over the last two years, Masimo’s constant currency revenue averaged 4.9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Masimo might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Masimo’s revenue to drop by 6.9%. Although this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping consumers, but in the case of Masimo, we’re out. That said, the stock currently trades at 31.8× forward P/E (or $171.97 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at the most dominant software business in the world.
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