What a fantastic six months it’s been for Masimo. Shares of the company have skyrocketed 45.8%, hitting $167.70. 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? Check out our in-depth research report to see what our analysts have to say, it’s free.

Despite the momentum, we don't have much confidence in Masimo. Here are three reasons why we avoid MASI and a stock we'd rather own.

Why Is Masimo Not Exciting?

Founded in 1989 to solve the "unsolvable problem" of accurate pulse oximetry during patient movement, Masimo (NASDAQ:MASI) develops and manufactures noninvasive patient monitoring technologies, including its breakthrough pulse oximetry systems that accurately measure blood oxygen levels even during patient movement.

1. Weak Constant Currency Growth Points to Soft Demand

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’s constant currency revenue averaged 4.7% year-on-year growth. This performance slightly lagged the sector and suggests it 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 27.6%, a decrease from its 1.4% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Masimo isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 36.9× forward price-to-earnings (or $167.70 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.

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