Legendary fund manager Peter Lynch said that you shouldn't invest in any idea you couldn't illustrate with a crayon.
I'm not much for crayons, but I do love the pithiness of that line. It's something we regularly preach at the Fool: Don't buy what you don't understand. And if you can't simply sketch out a company's business model -- how it, you know, actually makes money -- then maybe you shouldn't be investing in it.
Today I'd like to share a very simple visual of one of my own portfolio holdings, the surgical robot pioneer Intuitive Surgical (Nasdaq: ISRG ) . Here's my attempt to encapsulate the company's business model:
Disagree with me? Think I missed something? General thoughts on this exercise? I'll be reading the comments below, so please share. And if you haven't already, be sure to follow Intuitive Surgical using the Fool's free new My Watchlist tool.
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Report this Comment On October 15, 2010, at 3:57 PM, pondee619 wrote:
so the answer is no?
"Should You Sell Intuitive Surgical Today?
By Jeremy Phillips ...October 14, 2010 "
Report this Comment On October 15, 2010, at 4:33 PM, billbu wrote:
Was wondering how you arrived at your profit margin designations of
machine sales: slim
instruments & Acc: average to above average
service agreements: fantastic.
Looking at the Income statement for Q2 would indicate a GP% for services of just under 62% while the GP% for products (Instruments and machines) looks to be 75%+ It's harder to parse the instruments from the machines but I never got the impression that system margins were low. and 75% seems a lot better than average
System service seems to be fairly active and hands on sort of thing for these machines so it seems like the staffing and travel costs would contribute to a fairly high COGS for service revenue..
Report this Comment On October 15, 2010, at 7:38 PM, Borisbmx wrote:
add to the fact there are 19,000 hospitals worldwide, and a quick google new search list a hospital ordering its 3rd machine. If you back out cash of $50-ish a share, the shares trade for $230-ish or about 20x next years estimate, historically low. What's not to like!! maybe the next earnings report will give investors a new bullish attitude.
Report this Comment On October 17, 2010, at 11:44 PM, TMFBrich wrote:
@billbu,
Thanks for reading, and apologies for any confusion. I was comparing the three revenue streams to one another – so system sales’ margins are “slim” only relative to instruments and service. Also, I was editorializing with those descriptions. Intuitive is a razor-and-blades business model. The instruments and service agreements (both recurring) rely on the initial system sale, and as the saying goes, it’s always more expensive to get a customer than to keep one. System sales require manufacturing, direct selling through ISRG’s sales force, training doctors/surgeons on the machine and specific procedures, etc.
Thanks for reading.
Regards,
Brian Richards
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