Let's get right to it: Yes, Intuitive Surgical (ISRG 0.53%) is a buy.
But isn't the stock's valuation off the charts? Hasn't Intuitive's share price taken a nose dive over the last few weeks? Aren't potential competitors beginning to line up? Yes to all three questions. And Intuitive Surgical is still a great stock to buy.
The more important question is: Why is Intuitive Surgical such a smart pick right now? There are three clear reasons to buy the stock.
1. A fantastic moat
Perhaps the most appealing thing about Intuitive Surgical is the company's fantastic moat. Like the deep ditches filled with water surrounding medieval castles to help protect them, Intuitive also has a moat protecting it. There are at least two components to this moat.
One is the long track record for Intuitive Surgical's da Vinci robotic surgical systems. The company pioneered the use of surgical robots. Along the way, da Vinci has established a reputation for safety -- but it took a long time to build that reputation.
That's why there's no reason to worry too much about potential rivals. Medtronic hopes to soon compete against da Vinci with its new surgical robot. TransEnterix already has a system on the market that could do battle against da Vinci, although the company's CEO has stated that TransEnterix won't compete head-on with Intuitive Surgical. However, neither of these companies can point to years of safe surgical procedures that Intuitive can.
In addition, Intuitive's existing customers made significant investments to buy the da Vinci system. They're motivated to get as much return on that investment as possible rather than throw the system out and replace it with another.
2. Tremendous growth prospects
Moats defend, but Intuitive Surgical's moat also helps the company grow. The strong track record for da Vinci helps the company sell even more systems to new customers. Existing customers seeking to maximize their return on investment do so by using da Vinci for more surgical procedures -- generating revenue growth for Intuitive Surgical.
The company stands to benefit from long-term demographic trends as well. Baby boomers in the U.S. are aging. Countries in Europe and Asia are also seeing dramatic growth in the numbers of older residents. It's no secret that older individuals require surgery more than younger people do.
Variability remains a significant issue in surgery. Some surgeons have very low complication rates while others have high complication rates. With higher volumes of surgeries likely on the way as populations age, the costs of variability will grow. Robotic surgical systems help reduce the variability and costs, creating more opportunities for Intuitive Surgical.
The company is also working hard to expand the types of procedures for which da Vinci can be used. For example, Intuitive recently filed to kick off the regulatory approval process for its new Ion robotic-assisted platform for taking lung biopsies. Look for plenty of other new innovations from Intuitive in the years to come.
3. An attractive price point
Intuitive Surgical's shares trade at 39 times expected earnings. That's high for most stocks -- but not for Intuitive. Why has the stock historically traded at lofty price-to-earnings levels? Look back at the first two points. Intuitive's strong moat and its great growth prospects have made it worthy of a premium valuation. That's still the case.
But Intuitive is now 16% off its high set just a few weeks ago. The important thing to know is that nothing bad has happened to damage the company's business prospects. The broader market pullback has dragged Intuitive down, too.
Actually, Intuitive Surgical reported great Q3 results that were even better than they appeared at first glance. The company is placing increasingly more systems using operating leases rather than up-front sales. That could make year-over-year revenue comparisons seem like growth is slowing. The reality, though, is that it's setting up Intuitive for even stronger revenue and earnings in the future.
What if the stock goes lower?
It's entirely possible that Intuitive Surgical's share price could fall even more. It's tough for any stock, even those with excellent moats and growth prospects, to swim upstream when the overall market is headed in the opposite direction.
If that happens, consider yourself lucky. It gives you an opportunity to buy Intuitive Surgical at an even more attractive price. Over the long run, Intuitive should generate solid returns. You can win regardless of what happens next with the stock market.