When you think "medical robots," what name jumps to mind first?

Intuitive Surgical (NASDAQ:ISRG), of course. When it comes to pure-play medical robotics companies that make robots to assist surgeons in performing their surgeries, Intuitive Surgical is the one to beat (rivals Mazor Robotics and Mako Surgical having already been gobbled up and subsumed into larger med-tech companies).

As it turns out, when the Pentagon thinks about investing in surgical robots, Intuitive Surgical is the one they call, too.

Last month, in a twice-in-a-decade event, the U.S. Defense Logistics Agency announced it was awarding a five-year, $420 million contract to Intuitive Surgical to supply it with an unspecified number of surgical robots, as well as the "instruments and their related accessories" necessary to operate them. 105 companies applied for the contract, but Intuitive Surgical beat them all. 

And it might keep on beating them.

Surgeon at an operating table next to a robot labeled Surgical Robot Assistants

Image source: Getty Images.

Although the contract in question was described as a one-off "five-year contract with no option periods," it actually mirrors an earlier contract awarded in March 2015 that was also "a five-year base contract with no option periods." Judging from the lack of other mentions of Intuitive Surgical on the Pentagon's contracts website, that 2015 award appears to have been the first time that the Pentagon awarded a large contract to Intuitive Surgical. But it kind of looks to me like a pattern is forming here -- if you can call two five-year contracts, spaced five years apart, a "pattern." 

And it looks to me like in the future, Intuitive Surgical may be able to rely on the Pentagon providing an appreciable amount of recurring revenue to its business.

Consider: According to data from S&P Global Market Intelligence, Intuitive Surgical collected just under $4.5 billion in total revenue from across all its customers. So $420 million, stretched across five years, works out to just under 2% of Intuitive Surgical's revenue stream.

According to company filings, "no single customer accounted for more than 10% of [Intuitive Surgical's] revenue during the years ended December 31, 2019, 2018, and 2017." Management wasn't specific as to lower levels of "concentration" of sales among customers, but based on that one line, it seems likely that the Pentagon -- at 2% of revenue -- is now one of Intuitive Surgical's larger customers.

What it means to Intuitive Surgical investors

This is a good thing.

Since it burst onto the scene as a disruptor of the labor-intensive field of surgery, Intuitive Surgical has produced:

  • 45,000% total sales growth over the last 20 years,
  • 15 straight years of positive and growing profits, and
  • 15 straight years of positive and growing free cash flow.

That's all in the past, however. Going forward, S&P Global Market Intelligence estimates that investors can expect to see modest but respectable earnings growth rates of under 10% from Intuitive Surgical. As this company transitions from industry disruptor into industry stalwart, securing dependable, well-heeled customers such as the Pentagon could be key to maintaining steady revenue and supporting the stock valuation.

The next big thing

Meanwhile, it may be time for investors to begin scanning the horizon for the company that might disrupt Intuitive Surgical itself. After all, at a valuation of 50 times earnings today, but a growth rate of less than 10%, there's an argument to be made that Intuitive Surgical's best days (as an investment) are behind it.

So where should we look? Here at The Motley Fool, we've been following the rise of the robotics industry for some years now. To illustrate how important robots are becoming, in medicine and elsewhere, and how fast this industry is growing, it's worth highlighting that in the Pentagon's 2015 surgical robotics award, 35 companies competed for the contract that Intuitive Surgical ultimately won. Five years later, 105 separate companies competed for the contract (which Intuitive Surgical also won).

Notice the difference? Yes, in each case, Intuitive eventually won the contract. But in just five years, the number of medical robotics companies competing against it tripled.

That's pretty astounding. It also suggests that, if we're patient, one or more of these 70 new companies that have arrived upon the scene might eventually IPO, and give us a chance to get in on another growth story as big as the one that Intuitive Surgical has already become.