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Better Buy: Intuitive Surgical vs. Accuray

By Brian Feroldi - Apr 7, 2019 at 9:16AM

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Which medical-device titan is more worthy of your investment dollars today?

Intuitive Surgical (ISRG 0.32%) and Accuray (ARAY 2.97%) have a lot in common. They're both innovative medical device companies. They each market their products directly to hospitals. They are both leaders in their industries. 

Despite their similarities, long-term investors have experienced wildly different outcomes from holding their stocks. Intuitive has delivered multibagger returns for shareholders who bought after the IPO. Accuray's early investors have suffered a loss of more than 75% since the company's public debut.

Which of these stocks is the better choice for new money today? 

Man scratching head in front of lots of question marks

Image source: Getty Images.

The case for Accuray

Accuray's claim to fame is inventing the CyberKnife Stereotactic Radiosurgery System. This product uses a laser to deliver concentrated doses of radiation directly to the body to destroy cancerous tumors. This minimally invasive process minimizes damage to healthy cells and helps doctors treat parts of the body that are otherwise inaccessible. Accuray also sells other products that help doctors pinpoint the precise location of the tumor prior to initiating radiation therapy.

While the company's products are highly innovative, they are also challenging to sell. That's owed to the fact that they cost millions of dollars and require hospital systems to be flush with cash. On the plus side, the company has convinced more than 900 customers to sign on the dotted line so far. It also boasts a backlog of projects worth more than $460 million at the end of 2018.

Those numbers are impressive, but the company has struggled to translate sales into net income. It hasn't turned a profit in eight years. What's more, even when things are going well, the company only posts revenue growth in the mid-single-digits

Management is hoping that a new product line called Radixact will help to kick the company's growth into high gear. Radixact offers improved imaging and motion synchronization that might help it win over reluctant customers.

Radixact sounds exciting, but Wall Street is still projecting losses and mid-single-digit revenue growth moving forward. If those expectations prove accurate, it might be hard for investors to win. On the plus side, this stock is trading for less than one times sales, so investors don't have to pay up to own this business. 

The case for Intuitive Surgical

Intuitive kicked off the robotic surgery movement when it launched the da Vinci system two decades ago. The product had plenty of detractors at the start, but the company has steadily won over critics in the pursuing years.

What sets Intuitive apart from Accuray is its business model. Rather than make all of its money from expensive one-time sales, Intuitive employs a razor-and-blade business model. The da Vinci is the razor, and the company's disposable instruments and accessories are the blades. Intuitive also makes its customers' sign service agreements when they install a new system. This model explains why 70% of the company's revenue is both high-margin and recurring, which is a potent combination. 

Intuitive continues to boast a number of growth levers that should ensure that its top-line growth remains strong. The first is its recently launched da Vinci SP (Single Port) system, which enables surgery to be performed from just a single incision point. Next is the company's geographic expansion opportunity into massive countries like China and India. Finally, the company also has a long history of finding new uses for its robots. That helps to drive double-digit procedure growth.

When combined, Wall Street expects Intuitive's revenue to grow in the mid-teens. That's quite fast for such a mature business.

On the flip side, Intuitive's stock is currently trading for more than 40 times next year's earnings estimates, so it's possible the company's valuation has gotten ahead of itself.

The better buy

I'm hopeful that Radixact helps Accuray drive the growth it needs to flip to profitability, but the investor in me knows Intuitive Surgical is the better buy today. The company is highly profitable, growing quickly, and has a business model designed to pump out profits as more surgeries are performed on its products. Intuitive is so flush with cash that it even buys back its own stock on a regular basis.

Intuitive might be pricey, but this Fool (and long-term shareholder) believes the company is so high-quality that the valuation is warranted. That makes it the clear choice for new capital today.

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Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
ISRG
$223.30 (0.32%) $0.72
Accuray Incorporated Stock Quote
Accuray Incorporated
ARAY
$2.08 (2.97%) $0.06

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