Masimo Corporation's (NASDAQ:MASI) Popularity With Investors Is Under Threat From Overpricing

There wouldn't be many who think Masimo Corporation's (NASDAQ:MASI) price-to-sales (or "P/S") ratio of 3.7x is worth a mention when the median P/S for the Medical Equipment industry in the United States is similar at about 3.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Masimo

How Masimo Has Been Performing

Masimo could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Masimo's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Masimo?

In order to justify its P/S ratio, Masimo would need to produce growth that's similar to the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 79% in total over the last three years. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 4.9% per year over the next three years. That's shaping up to be materially lower than the 10.0% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that Masimo's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Masimo's P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Masimo's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Masimo you should be aware of, and 1 of them is a bit unpleasant.

If you're unsure about the strength of Masimo's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.