New drugs that improve treatment often get a lot of attention. But in recent years some medical devices have arguably had just as much impact as many of these drugs. Two companies making such devices are Intuitive Surgical (ISRG -0.37%) and Accuray (ARAY).
For investors, Intuitive Surgical has by far been the bigger winner. The stock has more than doubled over the past five years and is up close to 80% so far in 2017. Accuray stock, on the other hand, is down over 20% since five years ago and is up just over 5% year to date. But that's the past. Which of these two medical-device stocks is the better choice for investors?
The case for Intuitive Surgical
Intuitive Surgical launched its first da Vinci robotic surgical system in 2000. It's been a nice ride for the company, for the most part, since then. The da Vinci system has grown in popularity among surgeons and hospitals, with more than 750,000 surgical procedures performed using the system last year in the U.S.
There are several reasons why investors should still like Intuitive Surgical. One is the company's fantastic "razor-and-blades" business model. While the da Vinci system typically sells for between $500,000 and $2.5 million, Intuitive Surgical doesn't make the bulk of its money from system sales. Instead, 71% of the company's total revenue in 2016 stemmed from recurring sources -- instruments and accessories and services. And that percentage is growing.
The underlying factors supporting this growth in recurring revenue present more reasons to like the stock. System sales for da Vinci are increasing, with a year-over-year jump of more than 15% in the first nine months of 2017. Robotic-assisted surgery is becoming more accepted and embraced by the medical community. More procedures are being performed as well. Intuitive Surgical reported that 214,000 procedures were performed in the U.S. in the third quarter, up 15% from the prior-year period.
Perhaps the strongest argument for Intuitive Surgical, though, centers on its opportunities for growth. U.S. and world demographic trends should drive the numbers of procedures performed by da Vinci much higher in coming years. Intuitive Surgical should also benefit from international expansion, as only a little more than one-third of all current da Vinci implementations are outside the U.S.
The case for Accuray
Accuray markets radiosurgery and radiation-therapy systems for the treatment of tumors. The company's lead products are CyberKnife and the TomoTherapy system. CyberKnife is a robotic radiation-delivery system that treats cancerous and noncancerous tumors by targeting radiation to the specific locations of the tumors. The TomoTherapy system, including its next-generation version, Radixact, also uses radiation therapy, combined with imaging and treatment delivery, to treat cancer.
Like Intuitive Surgical, Accuray benefits from a business model that yields strong recurring revenue. Around 58% of the company's total revenue comes from services, which include installation, training, and sales of device parts.
Accuray posted year-over-year revenue growth of 5% in its last quarter. Although that probably won't excite investors much, its gross profit growth could. The company's gross profit soared nearly 22% over the prior-year period in the third quarter. While Accuray isn't profitable, its bottom line is definitely improving thanks to its gross profit trajectory.
What's the strongest reason to buy Accuray? The stock currently trades at barely over one times trailing-12-month sales. If the company stays on the path toward profitability, its market cap should grow significantly. There are some signs that this could happen: A recently published study underscored the efficacy of CyberKnife in treating prostate cancer. And customer demand for the new Radixact system is growing. A few years from now, Accuray could retrospectively look like a bargain at current price levels.
Which of these two arguments is more compelling? I think the hands-down winner is Intuitive Surgical. Although Accuray might be a successful pick for investors, Intuitive Surgical already is one. Its prospects continue to look bright, in my view.
Investors should be aware that Intuitive Surgical is likely to face intensified competition in the future. Several companies, both large and small, are eyeing the lucrative robotic surgical systems market. However, I think the market will expand enough to support multiple players -- and Intuitive Surgical's current leadership and continued innovation should give it a sustainable competitive advantage.