The Real Reason Intuitive Surgical, Inc. Is Tanking, Yet Again

It's not terrible earnings or revenue.

Apr 23, 2014 at 2:30PM

It's hard to believe, but even though Intuitive Surgical (NASDAQ:ISRG) announced yesterday that revenue fell 24% and earnings dipped 60%, those two numbers are not the reason the company's stock is selling off today.

That's because Intuitive already warned investors earlier this month that this is what the picture would look like. What, then, accounts for today's drop? Read below to find out.

Screen Shot

Source: Intuitive Surgical

The news that really had investors worried was the fact that the company cut the mid-range of procedure growth for the year from 10.5% all the way down to 5%.

Remember, this is a growth company with a stock trading for a growth-like multiple of 28 times earnings. When you tell investors that additional procedures are going to only come in at half of what you were originally expecting, there's going to be pressure on shares.

What does this really mean?
Intuitive doesn't break out exactly how many procedures are performed each quarter -- they only release that information at the end of the year. They do, however, let investors know how much procedures grew each quarter. During the first quarter, that was 7%. The realization that the full-year growth is expected to be around 5% means the company sees some tepid quarters ahead.

In previous years, procedures easily grew by double digits every year, so single-digit procedure growth is a big change -- and one investors are understandably concerned about.

The main culprit in all of this is, as before, the reduction in hysterectomies performed using Intuitive's daVinci surgical robot. To get an idea for how important gynecology, in general, and hysterectomies, in particular, are to the company, look at the breakdown of how the machine was used in 2013.

Screen Shot

Source: Intuitive Surgical

Clearly, the medical community's doubts about the efficacy and cost-effectiveness of da Vinci in benign hysterectomies is having an effect on the bottom line for Intuitive Surgical.

Moving forward, we have a stock that is trading for -- as I said -- about 28 times earnings and 22 times free cash flow. If you're new to investing, these aren't ridiculously high numbers, but they are above what you'd expect for a company that's experiencing as much trouble as Intuitive is.

The key moving forward will be the performance of Intuitive's new da Vinci Xi machine, and its ability to help diversify operations away from hysterectomies, and toward other procedures. With that, today could be a buying opportunity. Without it, the fall could just be getting started.

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Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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