Masimo Might See Potential Royalty Windfall From ITC's Exclusion Order On Apple Watch: Analyst

Needham analyst Mike Matson reiterated a Buy rating on Masimo Corporation (NASDAQ: MASI) with a price target of $136.

On Thursday, the ITC upheld a January judge's decision in an exclusion order, which found Apple Inc. (NASDAQ: AAPL) guilty of infringing Masimo's patent rights. These rights pertain to a light-based technology used in blood-oxygen-level monitoring. 

The exclusion is scheduled to go into effect after a 60-day Presidential review period. 

If MASI is ultimately successful, Apple might be forced to pay royalties, the analyst notes.

Matson estimates that the royalties could be $1-$2 per Apple Watch, totaling $50 million-$100 million of annual revenue or $0.65-$1.30 of EPS based on annual sales of 50 million Apple Watch units. 

However, the analyst expects Apple to appeal the ITC's decision to the U.S. Court of Appeals for the Federal Circuit.

And if an appeal is filed, there is likely a stay of the exclusion order during the appeals process, Matson adds.

As a result, royalties for Masimo could take considerable time if Apple pursues an appeal, per the analyst.

However, Masimo's Sound United acquisition provides it with strong consumer brands and a distribution channel for its nascent consumer health business, including its W1 smartwatch, the analyst notes. 

According to Matson, new product launches, market share gains, and new businesses such as hospital automation should enable continued strong growth in Masimo's medical business.

Overall, the analyst forecasts high-single-digit (or better) revenue growth, combined with product mix, cost-reduction efforts, and accretion from the Sound United Deal, to drive mid-teens (or better) earnings growth.

Price Action: MASI shares are trading higher by 3.88% to $83.99 on the last check Friday.