My opponent's argument for this investment surprises me. While it's an excellent review of the benefits offered by the Intuitive Surgical (Nasdaq: ISRG ) robotic system, it's short of expected growth rates and valuation metrics that investors need to consider.
Let's take a look at the new "S" model to the robotic line. At $1.53 million, its list price is $200,000 more than the current model, which will continue to be sold. For that extra money, you get fast setup, rapid instrument change, multiquadrant access, and multi-image display capabilities. It's hard to imagine a hospital making a major capital expenditure like this and not wanting the latest technology. But in the era of health-care cost containment, is the higher-priced model what hospitals are seeking?
The higher list price also makes me wonder whether the company isn't missing the long-term impact these systems have. Besides the $100,000-per-year maintenance contract, there's recurring instrument and accessory sales. Right now, that additional annual revenue adds up to $275,000 per system. That's a razor-blade business model, but the company is premium-pricing the new razor. Go figure.
The stock is trading for 18 times sales. That's rich. So are the other valuation metrics, especially for a company that's expected to grow earnings by just 25% a year. It's an interesting company, but until the stock price gets trimmed even further, the valuation is just too high.
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