Surgeons have a reputation for using the hottest new tools and techniques. Dentists, not so much. But don't let these stereotypes trick you into thinking that sophisticated surgical tools will make more money than a fresh and aesthetically appealing spin on dental braces.
Intuitive Surgical (NASDAQ:ISRG) and Align Technology (NASDAQ:ALGN) are on the cutting edge of their respective fields. Intuitive's robotic surgery suites are becoming more common -- and more advanced -- with each passing year. Align's tooth-straightening devices are experiencing similarly enthusiastic adoption. Given the toll of the coronavirus pandemic, however, these two companies are facing significantly different growth trajectories in the next few years, making one of them a much better buy than the other.
Would you trust a robot to perform a critical surgery?
Most people may not trust a robot, but they'd probably trust a human surgeon equipped with a few robotic tools, and that's where Intuitive comes in. Its robotic surgical tools include the legendary flagship da Vinci system. Designed to compete with minimally invasive surgery methods, da Vinci is used for a plethora of different procedures ranging from general surgery to gynecology.
More and more surgeries are performed with the da Vinci each year -- last quarter, the number was up 7% year over year. That means more and more revenue for Intuitive ... or so you'd think. A revenue decrease of 4% may have resulted from the company's highly generous customer relief program, which helped hospitals reeling from the negative economic impact of the pandemic by granting them benefits like free credits for maintenance and other services that would typically yield income. Thankfully, Intuitive still makes a pretty penny on accessories and service contracts, so revenue will return to growth when its customer assistance program concludes.
Nonetheless, the pandemic economy will probably put a damper on Intuitive's next few quarters as healthcare systems look to defer large capital costs like new robotic surgical systems, which can cost up to $2.5 million apiece. The company sold 21% fewer suites in the last quarter than during the same quarter in 2019, and this dip will probably continue through next year even as patients return to hospitals and catch up on the surgeries that were deferred. In the long term, Intuitive is still a powerful company with a lot of momentum for growth, but its product is going to be a tough sell while hospitals are still under a budget squeeze from handling so many patients ill with COVID-19.
Invisible braces yield eye-popping profits
If you ever had braces, you probably don't remember them fondly. Thankfully, there may now be a better way to straighten teeth. Align's primary product is its Invisalign teeth straightener device, which it advertises to teens and tweens. But Invisalign isn't anything like the braces you may have worn in adolescence. As the name implies, Invisalign straighteners are made with high-tech materials and molded precisely to the wearer's teeth, so they're barely visible once installed.
In the U.S., Invisalign is selling products quickly, driving stock-price appreciation. Quarterly sales were up by 24.9% year over year in Q3 2020 (which ended Sept. 30), even during the depths of the pandemic recession. International shipments are increasing even faster, at 33.6%. This growth was built with heavy investment in direct-to-consumer marketing on the internet, where Align has a social media following in excess of 10 million people. As people are more willing to return to their dentists, expect the company's investment in marketing to pay off even more.
Importantly, Align's business is highly repeatable. Each new class of middle schoolers is a fresh crop of potential customers. And the main competition, traditional-style braces and tooth-straightening systems, may be effective, but they're not nearly as invisible. So, for the moment, the Invisalign brand and its difficult-to-replicate product make for a decent moat, which is something investors should be excited about. This moat will likely protect Align's impressive profit margin of 76% for at least the next few years.
I am bullish on both of these stocks in the long term. Both companies create unique products that have difficult-to-duplicate advantages over the competition. But in the next year or so, I think Align Technology will outperform Intuitive Surgical. Align is unlikely to be as affected by the pandemic as Intuitive, because its product is marketed to consumers and not to budget-constrained healthcare systems. While it's true that consumers are also cash-strapped due to the pandemic, they can often pay for Invisalign with their dental insurance, so the costs aren't as significant.
Furthermore, Align didn't try to help its customers with a revenue-sapping assistance package. Intuitive's generosity should be lauded, but it will likely experience reduced revenue, reduced earnings, and less growth in its price for the next few quarters as a result.