There's Uncertainty Around Apple's Patent Appeal For Watch, Masimo's Royalty Exposure Is Priced In - Analyst Downgrades

Needham downgraded Masimo Corporation (NASDAQ: MASI), noting that though Apple Inc (NASDAQ: AAPL) royalties are not certain, but are mostly priced into MASI shares.

Wednesday, a U.S. appeals court temporarily halted the government commission's import ban on certain Apple smartwatches following a patent dispute with Masimo.

Apple filed a separate patent infringement lawsuit against Masimo in Delaware, characterizing Masimo's legal actions as a strategic move to pave the way for its competing smartwatch.

The analyst has downgraded the stock from Buy to Hold with no price target compared to a prior target of $86, noting the stock is trading at a substantial premium compared to its industry peers.

The analyst writes that Apple might only pay royalties if certain conditions are met during its appeal process or if its products do not infringe upon patents. 

The estimated sales figures for Apple watches in FY24 are 52 million, but it's unclear how many of these will be models that could owe royalties to MASI. 

Needham writes that MASI's earnings potential has suffered, possibly rendering the 2024 consensus EPS estimate overly optimistic. 

The proposed separation of Sound United could benefit MASI but negatively impact its EPS. Additionally, MASI's recently launched consumer health products are generating mixed feedback from initial users. 

Price Action: MASI shares are down 2.39% at $111.88 on the last check Wednesday.

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