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Why Intuitive Surgical's Coronavirus Sell-off is an Incredible Buying Opportunity

By Nicholas Rossolillo – Apr 2, 2020 at 6:53AM

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Elective surgeries may be on hold for now, but this healthcare stock has a lot going for it.

The outbreak of coronavirus is affecting the economy in unexpected ways. Nearly all things digital got a dose of rocket fuel as households have been stuck at home, and many employees are forced to work remotely. But not all digital economy companies have been winners. Robotic surgery outfit Intuitive Surgical's (ISRG -0.86%) stock is down nearly 20% from recent highs as the company's da Vinci machine is often used in elective surgery procedures. In an effort to combat the spread of COVID-19, many hospitals and surgery centers have delayed elective surgeries to conserve supplies and allow room for the potential influx of infected patients.  

In a nutshell, that means Intuitive's previous outlook for 2020 is likely to hit a speed bump during the first half of the year. However, for investors eyeing the long-term potential of technology as it makes inroads into the global healthcare system, the recent pullback is a gift.

Looking further down the road

Stock prices can gyrate wildly due to changes in short-term prospects for a company, but longer-term upside potential is driven by larger trends and how a business positions itself accordingly. As far as global healthcare goes, populations in developed economies are getting older, a trend that will likely hold for decades according to reports from the United Nations Department of Economic and Social Affairs.  

More people getting older has and will continue to put stress on the healthcare system. Short of just getting bigger, technology has been a key factor in the sprawling sector's ability to keep up. Robotic-assisted surgery is just one area that can help healthcare providers meet increased demand in addition to driving better patient outcomes. That's a massive tailwind for Intuitive and the various da Vinci systems it builds. Even though Intuitive is getting new competition, the pie is set to get significantly larger in the decade ahead. 

Thus, this stock remains one of my top healthcare holdings for the long term. Bumps in the road, like what coronavirus is sure to be, are opportunities for shareholders to make further purchases.

A surgeon standing next to a da Vinci robotic surgery machine's viewport.

Image source: Intuitive Surgical.

Strong cash flow and balance sheets win

But what about the company's ability to withstand the short term? After all, while rescheduled elective surgeries will possibly lead to pent-up demand, a cash crunch could be in order between now and then. For many organizations, that is a serious problem that needs to be bridged.

But for Intuitive, that won't be a problem. On the one hand, new sales and replacements of da Vinci systems could get delayed as hospitals prioritize spending to cope with coronavirus, as will the sale of materials related to elective surgery; on the other hand, not all procedures are elective. Plus, many da Vinci systems are sold on lease terms these days, so revenue won't go to zero in the next couple of quarters. And the company has plenty of wiggle room to navigate a reduction in revenue. In 2019, adjusted net income margin was a whopping 47.5%.  

Add to that a cash, equivalent, and short-term investment balance of $5.85 billion (which equates to over two years of revenue costs and operating expense using 2019 figures) and zero debt. Intuitive will be more than fine. In these times of economic distress, it will be able to continue innovating new uses for its robotic systems and make acquisitions as it expands -- like the recent takeover of hospital data and information technology services firm Orpheus Medical.

As bad as the news may get, focusing investment attention on stocks like Intuitive Surgical will yield big returns in the years ahead. With secular trends filling its sails and plenty of cash to take advantage of industry disruption, the coronavirus sell-off spells opportunity.

Nicholas Rossolillo and his clients own shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.

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Intuitive Surgical, Inc. Stock Quote
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