If you're a long-term investor, you already know that your job is to pick the best-performing companies in rapidly expanding industries. If you buy a stock at the right time in the company's lifespan, you'll have a much higher chance of benefiting as it settles into its market. On the other hand, if you miscalculate, you're liable to buy at precisely the wrong time, leaving you to watch as your investment trickles away over the next few months or years.
It's easy to see the risk of this trap with stocks like Intuitive Surgical (ISRG 0.42%), which makes the Da Vinci robotic surgical suite. Its stock has increased nearly 30% this year, echoing its strong performance since 2018, and its price is near its all-time highs. Nonetheless, the company's quarterly revenue shrank by 4.5% year over year, and its earnings contracted by nearly 21%. That's enough to get alarm bells ringing for most investors. But does it mean it's too late to invest? Are Intuitive's best days in the past, or can it rally from its losses this year?
2020 has been rough for the healthcare sector
Many of Intuitive's problems stem from the economic impact of the pandemic. With elective and non-emergency surgeries deferred to make room in hospitals for patients with COVID-19, the company's Da Vinci surgical robots haven't seen as much use as they would normally, especially in the first part of the year. This means that customers don't need as many paid maintenance services or disposable surgical tools. To help its customers, the company also gave maintenance credits, decreasing its most recent quarterly service revenue by $23 million.
Likewise, healthcare systems are struggling to pay for the equipment they need to treat infectious patients, so they may not have much left over in their budgets to purchase fancy new robots or new accessories for the robots they have installed. This led to 29% fewer robotic surgical suites being shipped in the third quarter compared to 2019.
So, if you looked at Intuitive's performance so far this year and started to question whether the stock's momentum was petering out, take heart. The conditions that caused its bad year should be clearing up through 2021. As the (hopefully) ongoing rollout of coronavirus vaccines gradually lessens the load on hospitals, people will need to get the surgeries that were deferred. And hospital budgets will recover over time, so they'll have enough money to buy more accessories for their robotic surgical suites, or perhaps entirely new units. Then, Intuitive will gradually start to resume its growth trajectory from before the pandemic, causing its stock to expand once again.
In other words, it's not too late to buy.
When's the next window of opportunity to buy?
Intuitive is already showing signs of resurgence. Its stock price recovered quickly from the crash in March, and the number of procedures performed with its Da Vinci robots increased 7% year over year in the third quarter. Plus, it still has many of the great qualities it had before the pandemic, like a healthy profit margin, zero debt, and strong cash flow. But its valuation seems a bit high, given that its price to earnings (P/E) ratio of around 88 is much larger than the medical equipment industry's average of roughly 46.
This means that conservative investors may want to watch Intuitive's stock like a hawk for any corrections. For those who are willing to pay a hefty price for reliable growth, it's probably a good move to buy it right now, because there's no guarantee that any correction will come, nor are there any catalysts for one on the horizon. After all, recovery from the pandemic will likely accelerate over next year. In the meantime, Intuitive will continue to install new Da Vinci systems, each of which will require maintenance contracts and a steady flow of disposable tools, thereby securing future revenue.