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Elevator Pitch
I award a Hold investment rating to Masimo Corporation’s (NASDAQ:MASI) stock. MASI’s PEG ratio of 3.2 times suggests that the stock’s valuations aren’t appealing. As such, MASI isn’t worthy of a Buy rating, as its excellent long-term growth prospects have been largely factored into its current valuations. In that respect, MASI warrants a Hold rating.
Company Description
In its most recent fiscal 2021 10-K filing, Masimo Corporation describes itself as a company that “manufactures and markets a variety of noninvasive monitoring technologies and hospital automation solutions.”
As revealed in the company’s December 2022 investor presentation slides, MASI generates 61% and 39% of its top line from healthcare and non-healthcare products, respectively. The key “Signal Extraction Technology or SET pulse oximetry” products contribute more than three-quarters of Masimo Corporation’s healthcare revenue, while home audio products account for the bulk of MASI’s non-healthcare revenue.
Excellent Long-Term Growth Potential
Masimo Corporation recently hosted its Investor Day on December 13, 2022, which offered a preview of how MASI could potentially perform in the future.
On the positive side of things, Masimo Corporation’s medium-to-long-term growth prospects are excellent, based on an analysis of the company’s disclosures at the recent Investor Day.
In the intermediate term, MASI has guided for its healthcare revenue to expand by a +9%-11% CAGR for the FY 2023-2028 period at its recent December 2022 Investor Day. This represents a +1 percentage point improvement as compared to Masimo’s earlier top line guidance for the company’s healthcare business.
At its 2022 Investor Day, Masimo Corporation cited market research firms’ estimates suggesting that the wearables, hearing enhancement, and telemonitoring markets are worth $50 billion, $30 billion, and $20 billion, respectively. MASI has new products in the pipeline to leverage on strong demand in these specific markets, and this provides the company with the confidence to raise its medium-term healthcare revenue guidance.
In the long run, Masimo Corporation has a significant growth runway. MASI disclosed in its investor presentation that it derives approximately 79% of its healthcare revenue from core SET pulse oximetry products, which is an area where it is the outright market leader.
In contrast, MASI only earns an estimated single-digit percentage of its healthcare revenue from telemonitoring & telehealth products, and Masimo Corporation has the potential to gain further market share in this relatively larger market (telemonitoring’s addressable market is almost seven times as large as that of SET pulse oximetry).
Specifically, Masimo Corporation estimated that the company’s Total Addressable Market or TAM increases from roughly $9 billion to around $171 billion, as the company expands into new product areas such as telemonitoring, wearables, and hearing enhancements. As a comparison, MASI’s trailing twelve-month revenue of $1,746 million (source: S&P Capital IQ) is merely 1% of the company’s TAM, which implies that it has substantial room for growth.
Disappointing Near-Term Outlook
On the negative side of things, MASI’s short-term financial outlook is disappointing as per the company’s fiscal 2023 management guidance provided at its December 2022 Investor Day.
Masimo Corporation offered its guidance for the company’s 2023 financial performance at its recent Investor Day. Specifically, MASI expects to record a top line in the $2,330-2,400 million range and a normalized earnings per share or EPS of between $4.25 and $4.45 this year. This translates into a mid-point revenue and bottom line guidance of $2,365 million and $4.35 per share, respectively.
Prior to the company’s Investor Day held on December 13, 2022, the Wall Street analysts had anticipated that Masimo Corporation will register a revenue and EPS of $2,363 million and a normalized EPS of $4.44 in FY 2023. In other words, MASI’s fiscal 2023 top line guidance met the market’s expectations, but the company’s FY 2023 bottom line guidance fell slightly short of the prior analysts’ consensus projections.
More importantly, MASI’s management guidance implies that the company will see its bottom line contract by -2.2% this year, despite an expected +17.0% revenue expansion over the same period. Masimo Corporation acknowledged at its recent 2022 Investor Day that the company needs to “continue to leverage operating expenses and balancing reinvestment to support those new product initiatives.” This explains why elevated costs will more than offset robust revenue growth for MASI in the very near term.
Valuations Are Rich
Masimo Corporation currently trades at 35.1 times consensus forward next twelve months’ normalized P/E, according to valuation data sourced from S&P Capital IQ. MASI had indicated at its December 2022 Investor Day that the company is targeting to achieve an earnings per share CAGR of +10%-12% (midpoint: +11%) for the long term.
This means that Masimo Corporation’s implied Price/Earnings-to-Growth or PEG valuation multiple is approximately 3.2 times. Using the rule of thumb that a stock is fairly valued at a PEG ratio of 1 times, MASI’s valuations are rather rich. Furthermore, there are execution risks associated with Masimo Corporation’s expansion into new product areas, which warrant some form of valuation discount for MASI.
Closing Thoughts
A Hold rating for Masimo Corporation is fair. On one hand, MASI’s intermediate-to-long-term growth outlook is good comparing its current revenue with its TAM. On the other hand, Masimo Corporation has to allocate significant capital to investments as a means of supporting its future growth, and this will be a drag on its earnings in the short term. More significantly, MASI’s valuations are demanding and don’t justify a Buy rating.
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