Few stocks have captured investors' imaginations quite like Tesla (TSLA 1.65%). A unique blend of the tech and automotive industries, the electric car maker has grown more than 3,200% since its IPO in 2010.

Intuitive Surgical (ISRG 2.92%), a pioneer in robot-assisted surgery, has brought similar disruption to the healthcare sector with its cutting edge da Vinci surgical system. With the coronavirus pandemic sending the stock market into its fastest bear market in history, now may be a good time for investors to scoop up stocks that can deliver market-beating returns when the economy rebounds. With growth of 100% in the last three years compared to 17% growth in the S&P 500, Intuitive Surgical fits the bill.

A surgical robot

Image Source: Getty Images.

What is Intuitive Surgical?

Founded in 1995, Intuitive Surgical develops and manufactures robotic surgical systems. The company uses a "razor-and-blade" business model where the da Vinci surgical system is the razor, and the equipment, accessories, and service contracts are its blades.

In 2019, the installed base of systems rose 12% from 4,986 to 5,582 units, while recurring revenue from equipment and accessory sales jumped 23% from $2.6 billion to $3.2 billion. Overall revenue rose 20% from $3.72 billion to $4.48 billion with recurring revenue making up over 70% of the total.

Da Vinci systems are mainly used for non-invasive urology and gynecology-related surgeries. This means demand should hold up, even in an economic downturn. But management is forecasting some near-term disruption due to travel restrictions and lower procedure volumes as people put off non-urgent medical needs until the coronavirus pandemic is over.

On April 8, Intuitive withdrew its previous 2020 guidance, which predicted growth for the year. The company expects the coronavirus pandemic to have a significant material impact on its financial results as elective procedures are delayed and da Vinci system installments are postponed. First-quarter results are due on April 20, and management will probably provide more information about their outlook for the rest of the year during the earnings call. 

The coronavirus pandemic has sent Intuitive Surgical's stock down around 14% year to date, which is in line with the S&P 500's performance over that same period. 

Tesla and ISRG stock performance over 10 years

Image Source: YCharts

Intuitive Surgical's valuation

Like Tesla, Intuitive Surgical has had a good run over the last decade, and its market cap now stands at around $54 billion. This is no small valuation. The company trades at around 12 times its 2019 revenue and 42 times the year's earnings. But sometimes you get what you pay for in the stock market, and quality comes at a price.

Intuitive Surgical can justify its high valuation with its potential for future growth and attractive business model. The global healthcare robotics market is projected to grow at a 12.6% annual rate. And as one of the biggest players in the industry, Intuitive Surgical is poised to benefit from this long-term megatrend. Every time the company sells a da Vinci system to a client, it creates a new revenue stream that drives future sales -- hence the high top-line multiple.

Intuitive has also begun leasing da Vinci systems to help clients overcome their upfront cost. Operating leases now make up around 34% of total installments and represented $107 million in 2019 revenue. These leases also help the company drive the more-important recurring revenue which made up 72% of Intuitive's 2019 sales compared to 71% in 2018. And this upward trend is set to continue as growth in the company's base of installed systems continues to drive recurring revenue growth.

Procedure growth is also a key factor in Intuitive's razor-and-blade business model. The more types of procedures that can be performed with the da Vinci surgical system, the sooner customers will need replacement accessories and equipment. Procedure volume grew 18% in 2019. And management guided for 13% to 16% growth in 2020. But guidance will probably be revised downwards because of the pandemic. 

Intuitive Surgical also has a strong balance sheet with lots of liquidity and relatively little debt. By the end of 2019, the company reported $5.84 billion in cash and equivalents on its books and only $418 million in debt.

Poised for market-beating returns

Investors are always looking for the next big thing -- a stock that can deliver market-beating returns over the long term. And while it's impossible to predict the future, Intuitive Surgical seems to fit the bill. The company generates sustainable revenue growth that will benefit from megatrends in healthcare robotics. And its strong balance sheet and attractive business model ensure that the stock has more room to grow despite near-term coronavirus headwinds. 

Like Tesla, Intuitive Surgical uses innovative technology to disrupt an already established industry. And while both companies enjoy large market caps and expensive valuations, sometimes you get what you pay for in the market. Quality often comes at a premium.