Intuitive Surgical (NASDAQ: ISRG) has risen almost 9% year to date, despite a tumultuous year for many healthcare equipment companies. But that shouldn't come as a surprise. For the past five years, the medical device stock has been a money-making machine, with revenue growing at a compound annual growth rate (CAGR) of 14.87%.
The reason for Intuitive's revenue successes is the company's main product, the da Vinci surgical system, which is the only surgical robot on the market designed for general surgery, according to the nonprofit ECRI Institute.
The da Vinci system is leading the way
The da Vinci system, approved by the U.S. Food and Drug Administration (FDA) in 2000, uses four small robotic arms to perform minimally invasive surgery, and gives doctors a 3D, high-definition view of procedures. Intuitive's latest da Vinci system is the da Vinci Xi, introduced in 2014.
According to Intuitive, the system allows for less invasive surgery through smaller, more precise incisions. The company has said that the system is ideal for particularly sensitive procedures, such as tubal ligation, prolapse and incontinence surgeries, and some cancer surgeries. The system, compared to standard surgery, generally reduces pain, blood loss, and scarring, allowing for quicker recovery and shorter hospital stays.
The da Vinci surgical system isn't cheap. Each costs around $4.6 million, according to ECRI, including a seven-year service contract. But despite that price tag, in its 2019 annual report, Intuitive said that in the past three years, the number of hospitals using five or more da Vinci systems at a single location has grown by more than 400%. The most common procedure performed with the system is a prostatectomy, the removal of the prostate gland because of cancer or severe urinary problems.
A report by Allied Market Research said it expects the market in robotic surgery to be $15 billion by 2027, with a CAGR of 13.7% in that time frame. The foothold of the da Vinci system in many hospitals means that Intuitive Surgical is well-positioned to capitalize from this massive market opportunity.
There are some legitimate concerns
While the company has a track record of increased revenue and net income, that hasn't been the case this year. Like many medical device companies, Intuitive's sales have fallen because fewer people are undergoing elective surgeries. Through six months, the company's reported revenues were $1.078 billion, down 4.6% year over year. Net income was $381.5 million, down a reported 38.9% from the same period last year.
Despite those lower numbers, investors have been bullish on the stock. At one point early this month, it hit $778 a share, and it is still the fifth-most expensive stock in the NASDAQ 100.
In the company's second-quarter earnings call, Intuitive CEO Gary Guthart said that procedures performed by its da Vinci systems were down 19% because of the effect of the COVID-19 pandemic, adding that while procedures were down across the board, gynecological procedures saw the greatest decline.
While it has the advantage of first-mover status, it does have to worry about at least one major competitor: Medtronic (NYSE: MDT). Medtronic has been investing increasing amounts of resources in robotic surgery. In 2018, it purchased Mazor Robotics, making it a major player in robotic spinal surgeries, and earlier this year, the company purchased U.K.-based Digital Surgery.
It's a play that works in the long-term
I don't like the stock in the short term. Intuitive is widely popular, but with a price-to-earnings (P/E) ratio of 72, it seems overpriced at the moment, particularly if elective surgeries come back slowly as the COVID-19 pandemic drags on.
However, in the long term, if you wait for it to come down a bit in price, Intuitive Surgical could become a millionaire-maker healthcare stock. This is mostly because of Intuitive's advantage as the first mover in a growing market. The beauty of the da Vinci machines the company has already sold is that they need regular maintenance, and the service of the machines is actually a more profitably activity for Intuitive than manufacturing and initially selling them.
The expense of the machines also sets a high bar for competitors, including Medtronics. Once medical procedures increase, Intuitive is in a good position to grow its market share. It has more than $6 billion in cash and no debt, and is set up to flourish as the market for robotic surgery expands.
10 stocks we like better than Medtronic
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Medtronic wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 1, 2020
Jim Halley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical and recommends the following options: long January 2022 $580 calls on Intuitive Surgical and short January 2022 $600 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.