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Morningstar | Masimo Continues to Gain Market Share, Supporting its Positive Moat Trend Rating

Masimo has established itself at the forefront of algorithms and sensor technologies for patient monitoring through the development of its proprietary signal extraction technology, or SET, for use in pulse oximetry and other measurement applications. The SET platform remains leagues ahead of competing products in terms of accuracy and reliability, leading to extremely sticky customer relationships and meaningful pricing power. Masimo has developed a hybrid go-to-market model that has allowed for the proliferation of its SET and next-generation rainbow SET measurement parameters through direct sales of Masimo monitors and through third-party OEM partners. The company leverages this installed base to drive utilization of its reusable and disposable sensors, which represent high-margin recurring revenue. This strategy has generated returns on invested capital substantially ahead of weighted average cost of capital each year since the 2007 initial public offering, and we believe ROIC is poised to rise higher over our forecast period. Management has transitioned from an infrastructure buildout mentality to one of measured investment, and the financials have begun to show improved leverage. Further, the recent settlement and joint venture agreement with Philips represents, in our view, one of the most significant milestones in the company’s history. While the partnership is still in its early days, we think the long-term outlook for Masimo is exceedingly bright.We view the company as having built a narrow moat for itself in patient monitoring through strong intangible assets protected by patents and proprietary trade secrets, as well as switching costs that have been embedded in its installed base. A strong top-down push to integrate Masimo sensor technology in Philips’ leading line of patient monitors will expand Masimo’s share of the installed base while upgrading customers to the company’s next-generation rainbow SET. This should help to not only better protect its intangibles-based moat source, but also raise the bar for competitors looking to catch up.