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1 Green Flag and 1 Red Flag for Masimo

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With a little more clarity on future plans, this could easily turn into two green flags.

Just when you think investing in healthcare companies might be the place for investors to hide out during a bear market, a company goes and does something that leaves more questions than answers. And when that happens, you get a sell-off caused by fear of the unknown.

This is what's happened to Masimo (MASI -2.14%) over the past three weeks, during which time the stock has slid 37% on the heels of a red-flag announcement. But can a green flag and a positive outlook pump a little oxygen back into investors' confidence?

Image source: Getty Images.

An acquisition leads to a stock share sell-off

Masimo is a global medical technology company that develops and manufactures devices and sensors used for patient monitoring. So, it makes perfect sense to acquire a company specializing in high-end commercial audio and theatre sound systems, right? That is unless you're the analysts covering the company doing the buying, or the company's investors.

In February, Masimo announced that it will spend $1 billion acquiring Viper Holdings, the parent company of Sound United -- well known for brands like Denon, Polk Audio, and Marantz. The idea behind the purchase is to cross-leverage Masimo's clinical solutions with the expertise and commercial channels of Sound United's audio technologies. Masimo CEO Joe Kiani believes the deal can bring immediate scale through retail channels such as Best Buy and Euronics in both the U.S. and Europe, respectively.

But the move left Street analysts perplexed, with BTIG noting that the acquisition leaves its analysts with more questions than answers. And Needham's Mike Matson noted that it's highly unusual for a medical technology company to acquire a non-healthcare consumer manufacturer, adding that he doesn't see cost synergies benefiting Masimo. However, he does see the potential for pipeline expansion. It also left the market bewildered, resulting in a 35% stock share price decline within a day after the announcement.

The company has stated that it will elaborate on its intentions behind the purchase later this year, and as the share price has dropped another 2% since the big sell-off, the announcement may not be that far from going from red to green. Nevertheless, there is a case to be made that the marriage between medical and audio can go a long way toward improving home healthcare systems and monitoring, allowing for expanded and improved offerings for telehealth.

Specialty sensors utilizing the ear can measure pulse oximetry for blood oxygen. Over time, perhaps combined solutions of the two companies will improve life experiences for people with hearing problems. As wearables such as Apple's AirPods become huge sellers, and with Masimo soon to release the upcoming Masimo Watch W1, is it really that unusual for Masimo to go this route? Or, could this be an opportunity in disguise for investors who are looking for a buying opportunity? It will certainly be worth keeping an ear out for what Masimo has to say during its first-quarter earnings call around May 4 to see if the company gets a bit more specific on its plans.

An FDA approval could come just in time to save investors

Usually, a Food and Drug Administration (FDA) approval would be just what the doctor ordered to help a struggling stock price. Treatment approvals can boost investor confidence in the future of a company and its growth potential, providing a boost to the stock. Masimo recently celebrated the FDA approval of its Sedline brain function monitoring system for children ages 1 to 17 in the U.S., expanding its patient base and global reach. However, the stock price did not get the memo and continued to slide in the wake of a broader market decline and the news from the aforementioned acquisition.

Monitoring the level of anesthesia necessary during operation procedures is critical to the care of patients. Too little, or too much, can severely impact the ability to carry out surgical procedures or hinder patient recovery in an optimal timeframe without further complications, respectively. By offering hospitals and urgent care centers the capability to monitor anesthesia levels based on real-time analysis of the brain, care facilities will not rely solely on characteristics such as a patient's weight and age. This should allow Masimo to generate new revenue in a market with a projected 9.8% compound annual growth rate (CAGR) through 2025.

In line with the CAGR for the market is Masimo's projection for 9.5% revenue growth in 2022, guidance that has remained unchanged since the third quarter of 2021. The company believes the worst is over for any negative COVID-19 impact on surgical procedure scheduling, and as 2022 carries on, the volume should ramp up. How much and how fast could determine if Masimo pulls off additional consecutive quarters of beating the street's estimates on revenue. It's on a streak of four straight as of now, averaging a 5.4% beat over that period.

As much as the acquisition of Sound United left analysts with questions, it did not deter them from seeing the potential of Masimo's pipeline. The average price target is $237, with Matson and others upgrading the stock after fourth-quarter results and signaling the potential for a 68% gain from today's price of around $141.

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