Intuitive Surgical (ISRG 1.03%) delivered a solid performance in 2019, with shares rising more than 23%. But that wasn't as good as the S&P 500 index, which gave investors a total return of over 31%. If you think that Intuitive Surgical is likely to lag behind the market over the long run, though, think again.
The robotic surgical systems pioneer presented on Tuesday at the annual J.P. Morgan Healthcare Conference in San Francisco. CEO Gary Guthart made a compelling case for his company's business prospects. In particular, there were four charts that Guthart discussed that show why Intuitive Surgical is a stock you can buy right now and hold for the long run.
1. Procedure trends
Probably the single most important metric for Intuitive Surgical is the growth in procedures performing using its flagship da Vinci robotic surgical system. The more procedures that are performed, the more customers will need replacement instruments and accessories -- which translates to higher revenue for Intuitive. The following chart presented at the J.P. Morgan conference shows just how strong the procedure growth tailwinds are for Intuitive Surgical.
There are a couple of things that especially stand out with this chart. First, the overall growth in worldwide procedure volume over the last six years has been impressive. Second, Intuitive Surgical continues to enjoy really strong growth in general surgery procedures.
However, you might look at the company's guidance of 13% to 16% growth in 2020 and wonder if da Vinci might be losing its sizzle to some extent. Keep in mind, though, that Intuitive has a history of sandbagging on its guidance. For example, in January 2019 the company projected that full-year procedure growth in 2019 would be between 13% and 17%. As the above chart shows, Intuitive beat the top end of that range. Don't be surprised if the company again delivers stronger growth than its guidance in 2020.
2. System placements and install base growth
Another important metric for Intuitive Surgical is how many da Vinci systems are installed. Some customers purchase the systems outright while others lease their da Vinci systems. Either way, Intuitive not only makes a lot of money over the near term, but it can also look forward to more future revenue as these customers perform surgical procedures using the da Vinci system. Below is a two-in-one chart from the company's J.P. Morgan presentation that underscores how much progress Intuitive continues to make in expanding its install base.
Note the right chart above shows that Intuitive Surgical's installed base grew by more than 12% last year. That should directly translate to solid procedure growth, as seen in the chart in the first point.
It's a little hard to tell from the small section of purple in the left chart above, but Intuitive is really picking up momentum in Asia. That's great news for the company, which historically has seen higher growth in the U.S. market.
3. Recurring revenue
Some companies experience wild swings in revenue from quarter to quarter and year to year because they're highly dependent on new sales. Intuitive Surgical doesn't have to worry too much about such volatility. The chart below shows the reason why.
Intuitive makes 72% of its revenue from recurring sources. That's a phenomenal level of recurring revenue. And it's only going to grow as the company's install base increases, driving procedure growth, which in turn drives sales of replacement instruments and accessories.
But Guthart also discussed another important factor fueling Intuitive Surgical's recurring revenue growth: operating leases. Customers are increasingly opting to lease robotic systems rather than make up-front purchases. Intuitive's operating lease revenue more than doubled in 2019 from the previous year to $107 million. Operating leases now account for 34% of total system placements, and the number is likely to head higher in 2020 and beyond.
4. What rivals have to do just to catch up
Several other companies have made news over the last year with key developments in their own robotic surgical systems efforts. Medtronic unveiled its new surgical robot system that will compete head-to-head against da Vinci. Johnson & Johnson is stepping up its game, acquiring Auris Health (which was founded by Intuitive Surgical founder Fred Moll) and buying Alphabet's stake in Verb Surgical.
Should investors be worried about new competition for Intuitive Surgical? The following chart shown by Guthart at the J.P. Morgan conference gives a pretty good reason why the answer should be "no."
The point of this chart is that there's a lot that has to be done to build out an ecosystem to survive and thrive in the robotic surgical systems market. Developing new systems and instruments isn't enough. There are regulatory hurdles to clear, customer training programs to develop, clinical support to establish, and a whole lot more. It's a long, multiphase process.
Medtronic and J&J could be successful in the robotic surgical systems market. However, both big companies are well behind Intuitive Surgical. It seems quite possible that the introduction of new robotic surgical systems could even improve Intuitive's prospects as the technology gains wider adoption.
Why buy Intuitive Surgical?
How do these four charts show why Intuitive Surgical is a great stock to buy? They demonstrate that the company has a strong underlying business with excellent growth prospects and an impressive and increasing level of recurring revenue. They also underscore the substantial first-mover advantage that Intuitive has over new competitors entering the scene.
Some healthcare stocks require investors to hope for regulatory approvals and strong commercial launches to achieve success. Intuitive Surgical doesn't. Its growth is practically guaranteed. And that's why the company's charts from the major healthcare conference this week highlight why this stock is a great pick for investors to buy and hold.