Image credit: Intuitive Surgical.
Shareholders of Intuitive Surgical (ISRG 2.87%) have finished out 2016 with good feelings. After experiencing a world of pain in mid-2013, shares of the company's stock have advanced for three consecutive years. In 2016 alone, the maker of the da Vinci robotic surgical system has seen shares rise as much as 23%.
But as any seasoned investor will tell you, this encouraging streak means little for the year ahead. And while Intuitive Surgical has been doing a great job of expanding its business at a healthy pace over the past few years, there are three big risks investors need to understand heading into the year ahead.
Changes to the Affordable Care Act
One of the biggest reasons that Intuitive Surgical's stock fell in 2013 was because hospitals began cutting back dramatically on spending in their budgets. The growth in the sales of da Vinci machines screeched to a halt. The cause: uncertainty about the effects of the Affordable Care Act.
Patient shareholders, however, were eventually rewarded as hospitals became more comfortable with their budgets and Intuitive came out with the new Xi machine, which has been very popular with surgeons.
But with the election of Donald Trump as president, and his promise to dramatically change how the ACA works, uncertainty and volatility in hospital budgets could resurface.
Though it is far too early to tell how this could play out, the bottom line for investors is this: Major changes in the healthcare law will likely create uncertainty. When their budgets are uncertain, hospitals will be conservative in their spending, which could lead to depressed levels of system purchases.
Negative reactions from the medical community
The second major risk that Intuitive shareholders need to accept before buying shares revolves around new guidelines based on medical research. This can be particularly troublesome because important findings can come out at any time, and often without any warning.
For instance, both prostatectomies and hysterectomies used to be huge growth drivers for Intuitive Surgical. But five years ago, the United States changed its suggested protocol for prostate screening, and growth in prostate removal surgeries slowed. Then, in 2013, professionals started to openly question the efficacy of using the da Vinci system in benign hysterectomy procedures, and growth came to an absolute halt.
Right now, hernia operations are huge growth drivers for Intuitive Surgical. As I'm not doing active research on hernia operations, there's no way I can know if there is research underway that could reflect poorly on the value that da Vinci adds in such operations. Currently, most of the research has been glowing, but much of it has been sponsored in part by Intuitive Surgical, so we need to view it with a measure of skepticism.
International headwinds
One of the stated goals of Intuitive in the coming year is to increase its presence in Europe and Asia. In fact, growth in procedures abroad -- along with increases in hernia operations at home -- was a key driver of 2016's positive results.
But there are a number of different factors that could combine to dampen results in 2017. Among the most obvious are currency headwinds: As the dollar becomes stronger, it becomes more expensive for hospitals in other countries to buy a da Vinci Xi.
Furthermore, one of the biggest opportunities for Intuitive Surgical is in China. But the country's communist leaders have tight restrictions on the number of devices that can be sold in any given year. Sometimes, the country can provide a large chunk of international sales. Other times, it doesn't. As with the direction of medical findings coming out, how China will approach da Vinci sales in any given year can be very difficult to predict.
But that doesn't mean you should run away
Having said all of this, it's important to point out that I myself am a current shareholder of Intuitive Surgical. I'm well aware of all these risks, but I also realize that as doctors continue to tinker with using the da Vinci in ever more procedures, there's more potential for the system to add value for all stakeholders: patients, hospitals, and shareholders.
I think that potential is worth the risk trade-off, but every investor needs to enter an investment in Intuitive with eyes wide open.
