Quantfury Gazette

Masimo (NASDAQ:MASI) investors cheer as company plots return to healthcare roots

by
Nathan Crooks
Quantfury Team
Masimo

Masimo (NASDAQ:MASI), a California-based health technology company, said last week that it would consider spinning off a consumer unit to focus on its more profitable core business of making medical devices, including pulse oximeters. Its shares immediately rose 13%, and investors could see more upside. 

The announcement came as the healthcare industry is staging a recovery with financial strain from labor shortages and inflation easing. While overall healthcare profit pools are on track to rise 7% annually through 2027, McKinsey & Company expects the healthcare services and technology subsector to grow almost twice as fast. 

“On the healthcare delivery side, financial performance will continue to rebound as transformation efforts, M&A, and revenue diversification bear fruit,” the consultancy wrote in a recent report

The sector is looking hot amid the confluence of multiple trends, including aging Baby Boomers and technological advancements like genetic engineering and AI analytics. Shares in Shockwave Medical (NASDAQ:SWAV), another medical device maker with a market capitalization of $12 billion, shot up 12% this week amid reports that Johnson & Johnson (NYSE:JNJ) was in talks to acquire the company. With its current market capitalization of $7 billion, a slimmed-down and refocused Masimo could make it an attractive target.

Masimo has been under pressure to get back to basics since it bought a consumer audio company in 2022 for $1 billion. Analysts weren’t the only ones who had a hard time understanding just how high-end speakers and medical monitoring devices would fit together, and the company’s shares ultimately shed almost 50% amid concern about that transaction. Since then, the company has underperformed when compared to its competitors. Medtronic (NYSE:MDT), for example, has seen shares return 9% over the past year, while Masimo shares have declined 16% over the same period.

It’s been a harsh lesson for founder and CEO Joe Kiani, who’s recently faced pressure to jettison the consumer business from activist investors with many reasons to insist. Producing specialty audio speakers is a tough game characterized by fierce competition, as Bang & Olufsen knows well, with its shares losing 65% over the past five years amid declining revenue. The healthcare sector, meanwhile, is not only growing, but it’s accounting for an ever-increasing portion of the economy. According to the Centers for Medicare & Medicaid Services, healthcare spending in the US rose 4.1% in 2022 to $4.5 trillion and accounted for 17.3% of gross domestic product. It’s now on track to grow 5.4% a year through 2031 when it will account for 20% of all economic activity.

Kiani, who was the architect of the original decision to acquire the audio headset business, says he’ll stick to the plan to now divest it, the opposite of the original idea.  

“I proposed a separation of the consumer business in January and the Board has agreed to move forward,” he said in a statement, adding that the company has the “unique and necessary technologies to make what I’ve been calling 22nd Century healthcare happen in the next few years.”

It’s an abrupt turnaround from what investors judged as a strategic error, and whether or not he is simply bowing to activist pressure or fixing a mistake of his own, the market is signaling it is OK to give Masimo and Mr. Kiani a second chance.

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