Medical device maker Masimo (NASDAQ: MASI) specializes in non-invasive monitoring equipment, making it well-positioned to fight the COVID-19 pandemic. But while the stock surged through April and May, it's trailing the market averages in June, as recent booms in Masimo's business threaten to erase some of their longer-term growth opportunities. As the company's future appears to arrive ahead of schedule, let's examine whether the company can find ways to keep growing.

A hospital patient wears one of MAsimo's devices as a doctor looks at the monitor.

Image Source: Masimo

What we know

  In the company's Q1 earnings report, CEO Joe Kiani said that "nearly everything we track is positive" through the end of March. 

Many of Masimo's products, especially its flagship sensors and monitoring equipment, operate on a razor-and-blade model. Hospitals buy the core equipment, then resupply the high-touch disposables as needed. For April 2020, overall sales, including Masimo's backlog, were up87% from the previous year. Sales of dispensable sensors outside of the U.S. were up 97%.

Orders for the durable core devices that use that disposable equipment were up a whopping 360%.   Often, more razors means more blades; more iPhones equals more iTunes. But in Masimo's case, the monitors only need more sensors when they have more patients. 

When the company withdrew 2020 guidance, it cited a potential oversupply crimping future demand.  .   If the world just bought four times as many pulse and oxygen monitors as it did in 2019, what are the chances it will need many more in 2021? Some stocks are set up to keep growing in a post-COVID world. But Masimo shareholders will need time to see the company and the market digest 2020. Beyond this year, supply and demand for Masimo's products looks extremely fuzzy. 

More isn't always better

This massive spike in demand has temporarily put a dent in the company's free cash flow. To expand its facilities and production around the world, Masimo increased its own capital spending fivefold from the first quarter of 2019. Wall Street certainly expects this expanded capacity to pay off for the rest of the COVID-19 crisis. When the crisis ebbs or the company's market becomes oversupplied, Masimo will have to realign its production again.

On the positive side, as COVID-19 wanes, people can get back to having their knees replaced or tonsils removed. Remember the huge growth in higher-margin sensor sales outside the U.S.? Well, sensor sales in the U.S. were barely up, because of fewer people were willing to risk infection to get less urgent procedures.   The stocks of Masimo's elective-focused peers have recently started rallying, suggesting that the return of non-emergency procedures will likely offset some of the drop in demand. 

What's in the pipeline?

Early in 2020, Masimo purchased Connected Health, which improves Masimo's ability to help hospitals connect all of their beeping and flashing monitoring equipment. But Masimo's spike in 2020 sales might slow down this strategy.

Hospitals are bleeding money. A report this week from MarketWatch cites that U.S. hospitals will have lost $200 billion by the end of June. Many may wait much longer than planned before they invest in upgrading their systems.

Another possible growth driver is Masimo's expansion into the consumer market. Its "SafetyNet" devices were originally developed to help doctors monitor opioid users, keeping an eye out for signs of complications. In the COVID crisis, doctors have used the device to monitor COVID-positive patients remotely in their own homes, saving hospital space for those in the most critical conditions. The device attaches to the wrist and monitors temperature, respiration rate, and oxygen It's been a massive success, with more than 650 hospitals were in line in April to deploy the professional version. SafetyNet has the potential to help Masimo maintain steady growth.

Masimo is an excellent company, having revolutionized its segment by almost eliminating false alarms in its equipment.  Its products save lives. The company has stepped up to help the planet fight COVID-19, providing free software licenses and discounted products to hospitals in need.  There is no doubt that the quality of its products and its ability to meet the surge in demand strengthened its brand.

Long-term investors, however, may need to be patient with the stock. Its future remains bright, but much of that future may have already arrived. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.