Two of my favorite medical-device stocks are Align Technology (NASDAQ:ALGN) and Intuitive Surgical (NASDAQ:ISRG). However, I've liked Intuitive a lot more after Align's share price plunged in the fourth quarter of 2018.
Both stocks are performing relatively well so far this year. But which stock is the better pick for the future? Here's how Align Technology and Intuitive Surgical stack up against each other.
The case for Align Technology
There are two primary arguments for why investors should consider buying Align Technology. First, the market for clear dental aligners has significant room for growth. Second, Align is in the best position to capitalize on that market opportunity.
The first argument is easy to defend. Most cases of malocclusion (misalignment of teeth) are still addressed using wire-frame braces. However, many dental patients, especially adults, don't want to wear braces that others can see. Clear aligners provide a solution.
Emerging middle classes in developing nations also present a tremendous growth opportunity for clear aligners. In particular, China and India have large populations with individuals who are prime candidates for using clear aligners.
But is Align Technology really in the best position to capitalize on the opportunities? The company has the most extensive network of dental professionals that promote its products in the industry. It has the widest international reach, with operations in major European countries, along with Australia, China, India, Russia, and elsewhere.
Align also continues to launch innovative new products. Its Invisalign Lite clear aligner corrects minor orthodontic issues and is worn for a relatively short amount of time. Invisalign Go helps general practitioner dentists identify, plan, and treat simple teeth alignment issues and integrates with Align's iTero intraoral scanner.
Granted, Align's growth rates are slowing somewhat as the company faces increased competition. The company recently lost an arbitration decision with SmileDirectClub which requires Align to shut down its 12 Invisalign retail stores. However, Align should see revenue growth of 20% or more in 2019 and probably for years to come.
The case for Intuitive Surgical
You can pretty much take the two arguments for buying Align Technology and apply them to Intuitive Surgical. The only change required is to replace the reference to clear dental aligners with robotic surgical systems.
The market for robotic surgical systems should definitely grow significantly in the future. The long-term demographic trend of aging populations around the world will drive the volume of surgical procedures higher. Many of those procedures, including prostatectomies, are ideally suited for robotically assisted surgery.
There's also currently a wide variety in surgical outcomes that robotic surgical systems could help address. For example, the numbers of complications and hospital readmissions for surgeons in the bottom quartile are much higher than for surgeons in the top quartile.
It's hard to argue that Intuitive Surgical isn't in the best position to benefit from growth in the market. The company pioneered the use of robotic surgery with its da Vinci system. Nearly 5,000 da Vinci systems are in use throughout the world.
New competitors are entering the market, though. Medtronic plans to launch a rival to da Vinci in the next year. Johnson & Johnson is acquiring Auris Health, positioning the healthcare giant to directly compete against Intuitive Surgical's new ION robotic system for minimally invasive lung biopsy.
However, Intuitive Surgical's huge install base and long track record should give the company a competitive advantage over its new competition. Existing customers are much more likely to seek to maximize their return on investment with da Vinci than switch to a new system. And Intuitive's history and innovation should continue to attract many new customers.
In my view, the decision between Align Technology and Intuitive Surgical comes down to which company has a stronger moat. I think that company is Intuitive Surgical. There's no question in my mind that the barriers for entry are much higher in the robotic surgical systems market than in the clear-aligner market.
I also really like Intuitive Surgical's razor-and-blades business model. Over 70% of the company's total revenue comes from recurring sources like replacing instruments and accessories for da Vinci systems. This generates a steady stream of revenue for Intuitive that it can plow back into developing new technology.
Am I negative about Align Technology? Not at all. I still expect the company to deliver solid growth for a long time to come and intend to hold on to my shares. If I could only buy one of these two stocks, though, it would be Intuitive Surgical.