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Is Intuitive Surgical a Buy?

By Jim Halley - Jan 27, 2021 at 6:30AM

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Intuitive Surgical is down more than 7% since the start of this year. Does this present a buying opportunity or is it the harbinger of more bad news?

Shares of Intuitive Surgical (ISRG 0.32%) are down more than 7% since the start of January. Investors apparently weren't thrilled with the company's fourth-quarter numbers, which came in Thursday evening, and the stock fell 6.84% on Friday.

The irony is the fourth quarter numbers were fairly positive. It was the first earnings period since the first quarter of 2020 during which the robotic-assisted surgery (RAS) company had better revenue than the year before.

Net revenue in the quarter was a reported $1.3 billion, a rise of 4% year over year, and net income was $365 million, compared to $358 million in the same quarter in 2019.

Man with question marks floating above his head.

Image source: Getty Images.

Tracking the sources of pessimism

The stock could have dropped after the report because it showed Intuitive's annual revenue down for the first time in five years, though it was only down 3%. The company attributed the decline to fewer robotic procedures being performed as hospitals concentrated on COVID-19 care. Another factor might be that net income was only $3.11 per share, just $0.02 more than it was in the same quarter in 2019.

The most likely reason for the drop is that the company did not issue first-quarter 2021 guidance because of the resurgence of COVID-19 in January, essentially telling investors something they should already know: As long as COVID-19 cases are high, the company's da Vinci surgical procedures are likely to be negatively impacted.

ISRG Revenue (TTM) Chart

Focus on the long-term possibilities

Intuitive's recent share decline is good news for investors, except those who already own the company's stock. Intuitive's forward price-to-earnings ratio is still high at 58.4, especially when compared to medical device competitors such as Medtronic or Stryker. However, the company is an entrenched leader in RAS and it has the setup in place to continue posting huge revenue numbers.

The company's installed base of da Vinci surgical systems increased to 5,989 in the quarter, up 7% year over year. That's a key number because while the company makes money from selling the da Vinci systems, it makes even more supplying and servicing them. That's an engine that's going to continue to make money for Intuitive. For example, while the company shipped 326 da Vinci systems in the quarter, 10 fewer than it did the same quarter in 2019, revenue from instruments and accessories was $747 million, up 11% year over year.

Another advantage Intuitive has is it is the market leader in a field where the cost of developing a robotic surgery system is an effective moat. The cost for a da Vinci system is around $2 million and that doesn't count Intuitive's annual service contract with a hospital to service the machine, which runs between $100,000 and $170,000.

Hospitals that already have a da Vinci system have invested a lot of money in the use and maintenance of the system, making them less likely to buy a competitor's product. Intuitive's revenue numbers have risen steadily and would have done so this year as well were it not for the pandemic. Many of the procedures performed by da Vinci systems that were put off by the pandemic, such as cardiac bypasses, colorectal surgeries, or hysterectomies, are not the type of operations than can be forestalled forever. But once the pandemic winds down, these surgeries should pick up.

One word of caution

While the costs of developing robotic assisted surgery systems will keep most competitors at bay, the company does have to look over its shoulder at what Johnson & Johnson (JNJ -0.09%) is doing with its medical device subsidiary, Ethicon.

In 2019, Johnson & Johnson spent $3.4 million to buy robotic surgery company Auris Health, which was founded by Intuitive Surgical founder Fred Moll. In the process, Johnson & Johnson acquired Auris' Monarch platform for endoscopies. In November, the healthcare giant unveiled its plans for its own RAS system, Ottava.  

MDT Profit Margin Chart

MDT Profit Margin data by YCharts

In the long run, there's plenty of opportunity

Johnson & Johnson won't be the only competitor to come along for Intuitive, but that shouldn't be that concerning. Intuitive's profit margin of 24.3% and gross profit margin of 65.5% are just two signs that suggest the company is maintaining its strong position.

The demand for robotic-assisted minimally invasive surgeries is going to increase and as a pioneer in the field, Intuitive is well positioned to benefit from that trend. A study by Data Bridge Market Research puts the compound average growth rate (CAGR) for robotic-assisted surgery at 14.7% over the next seven years. It stands to reason that as baby boomers age, the types of procedures performed by Intuitive's da Vinci systems will increase.

There's plenty of potential for growth, even with a bit of added competition. 

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Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$223.30 (0.32%) $0.72
Johnson & Johnson Stock Quote
Johnson & Johnson
$179.46 (-0.09%) $0.16
Stryker Corporation Stock Quote
Stryker Corporation
$234.94 (-0.03%) $0.07
Medtronic plc Stock Quote
Medtronic plc
$99.44 (-5.78%) $-6.10

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