Table V.
Top 10 holdings as of March 31, 2024 | | Year Acquired | Quarter End Investment Value (millions) | Percent of Net Assets |
|---|
| DraftKings Inc. | 2023 | $56.1 | | 3.6% | |
| Kinsale Capital Group, Inc. | 2016 | 52.5 | | 3.4 | |
| Axon Enterprise, Inc. | 2022 | 45.1 | | 2.9 | |
| CyberArk Software Ltd. | 2022 | 42.6 | | 2.8 | |
| Advanced Energy Industries, Inc. | 2019 | 40.3 | | 2.6 | |
| GitLab Inc. | 2022 | 39.5 | | 2.6 | |
| SiteOne Landscape Supply, Inc. | 2016 | 39.3 | | 2.5 | |
| Masimo Corporation | 2024 | 38.9 | | 2.5 | |
| Floor & Decor Holdings, Inc. | 2019 | 38.9 | | 2.5 | |
| Axonics, Inc. | 2020 | 38.8 | | 2.5 | |
Recent Activity
Table VI.
Top net purchases for the quarter ended March 31, 2024 | | Year Acquired | Quarter End Market Cap (billions) | Net Amount Purchased (millions) |
|---|
| Masimo Corporation | 2024 | $7.8 | | $35.9 | |
| Intapp, Inc. | 2024 | 2.5 | | 18.2 | |
| Allegro MicroSystems, Inc. | 2020 | 5.2 | | 15.4 | |
| RH | 2022 | 6.4 | | 10.6 | |
| CareDx, Inc. | 2024 | 0.5 | | 10.2 | |
We’ve made a new investment in Masimo Corporation, a provider of high-end vital sign monitoring equipment and software. This presents a unique investment opportunity, as the company is currently unwinding an unpopular consumer products acquisition. We believe this will unlock the full value of its core health care business. Masimo is a market leader in monitoring pulse rates, oxygen levels, perfusion, blood hemoglobin content, and other key vital signs. Studies have shown that Masimo’s high-quality monitoring can save lives and money through increased accuracy and better warning capabilities.
The base health care business generates revenues of about $1.3 billion, according to 2024 company guidance. About 15% of this revenue comes from non-recurring sensor hardware sales (what Masimo calls sockets), which serve as the “razor” in the analogy of the business model. The remaining 85% of revenues come from disposable sensors, the “blades” in the analogy, which produce recurring and growing revenue. Masimo aims to grow its health care revenues by introducing new products, expanding its customer base both in the U.S. and internationally, and encouraging existing customers to purchase additional vital sign parameters for their existing sockets. Currently, the company averages about $8 per socket in sensor revenues, but this has the potential to increase to $100 per socket over time. While we don’t anticipate a 12-fold increase in revenues, we do believe revenues could double over the next seven years. Additionally, margins are expected to expand due to gross margin improvements from the completion of a new Malaysian manufacturing facility and operating leverage as the sales force is largely built out, with a comfortable research and development budget in place. Consequently, the overall base business cash flow could double within six to seven years.
However, Masimo’s acquisition of Sound United in early 2022 for $1 billion overshadowed these prospects. Sound United designs and manufactures high-end stereo equipment under brands like Marantz and Denon. Masimo is launching a smartwatch designed for higher-end vital sign monitoring in both the health and consumer markets, in comparison to products like Apple and Android watches. It acquired Sound United primarily for its sales and distribution assets. However, this acquisition added debt, and the market perceived it as a diversion from its health care roots. As a result, shares dropped nearly 70% by October 2023.
Our interest in Masimo was piqued when an activist began pushing for the separation of Masimo’s consumer and health care businesses. At the end of the first quarter, Masimo announced its plans to explore modalities for splitting the two businesses, including a spin-off or JV structure. We believe this move is excellent and will unlock value in the currently underappreciated health care business. Additionally, Masimo is likely to retain a good portion of the potential proceeds from a lawsuit against Apple, alleging patent infringement related to vital signs on the Apple Watch. While this could be worth hundreds of millions or more in ultimate value, we view it as just additional value optionality on the investment. Overall, we believe we can double our investment from current valuation levels through Masimo’s cash flow growth and a higher trading multiple, which we believe will be justified by the cleaner health care structure the company should achieve this year.
We also initiated a position in Intapp, Inc., a company founded in 2000 that provides cloud-based software for regulated professional services industries such as legal, accounting, consulting, private capital markets, and investment banking. Intapp’s software helps manage and automate many of the administrative workflows unique to these industries, such as clearing conflicts for new engagements, onboarding new clients, recording billable hours, and establishing regulatory walls between divisions. Its DealCloud suite also functions as a deal lifecycle management and customer relationship management system that has become the industry standard in private equity and investment banking. Intapp serves more than 2,400 customers, including 96 of the top 100 American law firms, 15 of the top 20 accounting firms, and 1,600 leading financial services firms.
Intapp competes in a large and growing addressable market, encompassing 28,000 firms that collectively spend roughly $15 billion annually on software in Intapp’s categories. The company has grown its annual recurring revenue by more than 20% annually for the past five years as customers have seen good returns on their Intapp investments. For example, Intapp products have helped professional services firms reduce new client onboarding and conflict clearance processing times by more than 50%, saved millions of dollars in billable hours leakage, and significantly expanded new deal origination volumes for financial services firms. This success has led to low churn rates, increased market share capture, and expanding footprints in existing accounts.
We see a long runway for growth through a combination of new customer wins and existing customer expansion. Management believes its largest 200 customers alone represent a $1.3 billion wallet opportunity and that Intapp can continue to generate mid-teens expansion rates in existing accounts by cross-selling product modules, growing its user penetration, and capturing better pricing. While Intapp is profitable today and has expanded its free cash flow margins over the last two years, we see an opportunity for margins to increase further to 20% or more as the company benefits from operating leverage and a higher cloud revenue mix. The combination of good organic growth and free cash flow margin expansion should bode well for the stock in the long term.
We added to our investment in Allegro MicroSystems, Inc., a fabless designer and manufacturer of integrated circuit (IC)-based sensors and application-specific analog power ICs for automotive and industrial markets. We had meaningfully reduced our position in the third quarter of 2023 given what we viewed were extreme valuations, even on long-term metrics. Since then, shares have come down from a low-$50’s level to the mid-$20’s, and we re-loaded the position as we view Allegro as a solid long-term grower that can double again from here.
During the quarter, we added to our position in RH, a high-end retailer of home furnishings and furniture that has a unique vision to transform from a domestic furniture company to a global luxury brand. Shares were pressured in the earlier part of the quarter due to shorter-term concerns regarding demand amid a volatile macroeconomic environment. Despite these shortterm pressures, we remain confident in RH’s ability to gain market share in the fragmented high-end furnishings market, and we see a multi-year growth pipeline driven by store expansion around the globe. We also anticipate improved profitability for RH as it transitions back to a full-priced sales model and scales its early international investments.
CareDx, Inc. is a diagnostic company that facilitates organ donor matches pre-transplant and rejection monitoring post-transplant. Transplant rejection testing is recurring and can help ensure the right immunosuppressant treatment to avoid overdosage or organ loss. We re-established an investment in the company after selling the position in the first quarter of 2023. At the time, the reason given for the sale was a very unexpectedly negative notice from MolDx, the CMS-related entity responsible for determining pricing and reimbursement criteria for diagnostic tests. This notice significantly exceeded our worst downside scenarios. The vagueness of the notice from MolDx, combined with the potential for a far reduced paid volume of approved tests for Medicare patients put a dramatic amount of current revenue and profitability at risk.
We determined that until the issue is resolved, we could not properly underwrite our investment in the company. The company has now overcome the massive negative revenue impact of the CMS notice and has begun growing revenues again under the lower reimbursement regime. Combined with improved cash collections and significant efficiency gains in operating expenses, we believe the company will achieve cash flow breakeven by 2025. This, coupled with $235 million in cash and zero debt on its balance sheet, positions the company for complete self-funding.
The company currently trades at only 1.3 times its enterprise value to sales ratio, which should be at least double its present level. We believe there is a good chance that the CMS guidelines will be reversed or at least improved from their current state. This would create a best-case scenario where the company’s valuation could potentially see significant growth in a short timeframe.
Table VII.
Top net sales for the quarter ended March 31, 2024 | | Year Acquired | Market Cap When Acquired (billions) | Quarter End Market Cap or Market Cap When Sold (billions) | Net Amount Sold (millions) |
|---|
| SiTime Corporation | 2023 | $2.3 | | $2.1 | | $10.4 | |
| Navitas Semiconductor Corporation | 2021 | 0.5 | | 0.9 | | 8.6 | |
| Ichor Holdings, Ltd. | 2016 | 0.2 | | 1.3 | | 8.6 | |
| Repligen Corporation | 2023 | 8.7 | | 10.3 | | 7.8 | |
| CyberArk Software Ltd. | 2022 | 5.2 | | 11.2 | | 7.8 | |
We trimmed our position in CyberArk Software Ltd. to manage its position size after gaining a solid appreciation in the stock. That said, we continue to like the company’s strong competitive footing in identity security and are optimistic about its longer-term growth prospects.
We trimmed our position in Repligen Corporation, a life science tools supplier to the bioprocessing industry. 2023 had been a year of headwinds, including customer destocking, biopharmaceutical funding constraints, and weakness in China. Estimates have moved lower, and the recovery is taking longer than expected, while valuation has moved up significantly to levels where we wanted to de-risk a bit. We still like the company’s long-term positioning.
We sold the remaining portion of our position in Ichor Holdings, Ltd., which manufactures semiconductor capital equipment components, as we felt the stock’s valuation was already embedding a relatively strong upcycle in wafer fabrication equipment spending and to make room for other positions with more long-term upside.
We reduced our position in Navitas Semiconductor Corporation, a provider of analog power management semiconductors, due to concerns about the near-term outlook for consumer spending (particularly in the communications charging segment), increased competition from Chinese companies, and mixed signals from the auto industry, which is a new growth area for the company. We continue to like the company’s products and are watching the environment closely. We also reduced our position in SiTime Corporation, which manufactures analog semiconductors that regulate timing within chips and for communication applications. This was for similar reasons to our Navitas reduction, aside from the Chinese competition. We remain excited about SiTime’s long-term growth prospects, and we still believe it can achieve its targeted 30% revenue growth rate and 30% operating margin.
