Over the past six months, Masimo’s shares (currently trading at $142) have posted a disappointing 17.2% loss, well below the S&P 500’s 18.4% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Masimo, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Masimo Not Exciting?

Even with the cheaper entry price, we're cautious about Masimo. 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 is one signal of 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 6.8% compounded annual growth rate. This was below our standard for the healthcare sector.

2. Constant Currency Revenue Hits a Standstill

Investors interested in Patient Monitoring companies should track constant currency revenue in addition to reported revenue. 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 failed to grow its constant currency revenue. 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.

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. Unfortunately, Masimo’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Masimo’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 28.6× forward P/E (or $142 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.

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