If you're looking for a stock that represents how technology can transform healthcare, look no further than Intuitive Surgical (ISRG -0.41%). The company's robotic surgical systems are now used to perform hundreds of thousands of procedures across the world. And the stock has reflected the widespread adoption of Intuitive Surgical's technology, with gains of 70% over the last 12 months.
However, there's always a big question for investors with a super-successful stock like Intuitive Surgical: Is it too late to buy? Arguments exist both for and against buying Intuitive Surgical stock. Here are the strongest ones -- and which case is more compelling.
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Why to buy
The case for buying Intuitive Surgical stock is straightforward. First, global demand should increase for robotic surgical systems. Second, more systems implemented across the world will fuel demand for instruments and accessories involved with the surgeries, since these parts wear out with use. Third, Intuitive Surgical has a commanding lead in the market and the financial ability to maintain that lead.
Let's look at each of these arguments in more detail. There's no question that global demand for robotic surgical systems has increased over the last few years. Between 2012 and 2017, the number of procedures performed with robotic assistance more than doubled.
But will this kind of growth continue in the future? I think so. Demographic trends should mean more surgeries, including radical prostatectomies and hysterectomies -- two of the most common procedures for which Intuitive's da Vinci system is used. Technological advances should also enable da Vinci to be used in even more types of procedures than it is now. These two factors should drive demand for robotic surgery higher in the years to come.
And if that demand increases, customers will need more instruments and accessories. Intuitive Surgical makes more than half of its revenue from sales of these items.
Intuitive Surgical dominates the robotic surgical systems market, with an installed base of more than 4,400 systems. The company invests more than 10% of revenue into research and development. And it had a cash stockpile of $3.8 billion, including cash, cash equivalents, and investments, at the end of 2017. Intuitive's R&D investments and financial strength should allow the company to stay on top of the robotic surgical systems market.
Why to stay away
What's the case against buying Intuitive Surgical? It's probably futile to argue that demand for robotic surgery won't increase. However, there's no guarantee that Intuitive Surgical will capture the greatest part of that increased demand.
For several years, Intuitive Surgical has operated with a virtual monopoly. That's changing. TransEnterix (ASXC -2.81%) won FDA approval for its Senhance surgical robot system last year. Senhance claims some features that are better than da Vinci, including haptic feedback -- where the system recreates the sense of touch that surgeons would feel if they were performing procedures using traditional surgical instruments instead of a robotic system.
There's also another nice thing about Senhance: Its instruments are reusable. That could give TransEnterix a significant competitive advantage over Intuitive Surgical. For now, though, TransEnterix's CEO says that his company won't compete directly against Intuitive Surgical. We'll see how long that lasts.
In the meantime, Intuitive Surgical faces a much larger challenger than tiny TransEnterix. Medical device giant Medtronic (MDT 0.14%) plans to launch its own robotic surgical system later this year. Medtronic's system is expected to go head-to-head against da Vinci.
Medtronic already has relationships with hospitals across the world with its other products. The company could conceivably bundle its robotic system with other products that it sells to present a compelling value proposition for customers. Medtronic also has the financial strength to invest more heavily in R&D than Intuitive Surgical can.
Intuitive Surgical can't overlook potential competition from Verb Surgical, either. Verb is a joint venture between Google parent Alphabet and Johnson & Johnson. The company demonstrated a working prototype system to senior leadership of Alphabet and J&J in early 2017.
Verb seems to be aimed at targeting more complex surgical procedures that da Vinci doesn't address currently. However, one of Intuitive Surgical's pathways to growth is to expand the types of procedures for which da Vinci is used. Verb could present a challenge for the company in the not-too-distant future.
Intuitive Surgical commands a premium valuation because of its near-monopoly status in a high-growth business. With that near-monopoly status going away, the premium valuation could come under pressure. That's perhaps the strongest case against buying the stock right now.
Final verdict
So is Intuitive Surgical stock a buy? I think so.
My view is that the market for robotic surgical systems can expand enough to support multiple players. If the market does get crowded, I suspect there would be consolidation, with Intuitive Surgical emerging as a winner.
I also think it's a mistake to underestimate the advantage that Intuitive Surgical has from its years of real-world experience. One of the challenges the company faced for quite a while was demonstrating the safety and effectiveness of its da Vinci system. All of its rivals have to start from square one tackling this same challenge, while Intuitive Surgical can point to multiple case studies, over 13,500 peer-reviewed publications involving da Vinci, and thousands of customers who have successfully used the system.
In sports, sometimes the best athletes get even better when they compete against formidable rivals. I won't be surprised if that's what happens with Intuitive Surgical in the face of new competition from TransEnterix, Medtronic, Verb Surgical, and others.
