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The Scariest Part of Intuitive Surgical's Latest Earnings Call

By Cory Renauer - Feb 8, 2021 at 6:55AM

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Here's why shares of the surgical robotics company have been under pressure.

Intuitive Surgical (ISRG 0.43%) stock has more than quadrupled investors' money over the past five years, but it doesn't take much to make them nervous. Despite its resilient competitive advantage, shares of the surgical robotics company have fallen in response to forward-looking comments from management about the year ahead.

In this Motley Fool Live video recorded on Jan. 29, healthcare and cannabis bureau chief Corinne Cardina and writer Cory Renauer discuss why a soft forward outlook for 2021 isn't a reason to dump your Intuitive Surgical shares.

Corinne Cardina: Were there any things that you might consider to be a red or yellow flag possibly related to the hospital issues?

Cory Renauer: On the call, the company made investors awfully nervous with what I would still consider a yellow flag. Intuitive Surgical told investors that the current surge in coronavirus cases that we've been seeing since the end of 2020, that's going to be a big problem into at least the first quarter of 2021 and probably the second, and third and knows how long. Management didn't provide any guidance ranges for this year, which is unusual for revenue or earnings, and that's uncertainty. Nothing disturbs the market more than uncertainty.

The company also raised a lot of eyebrows by reminding investors that the number of general doctor visits that eventually result in a procedure being performed with one of their machines and use of the accessories that need to be repurchased, that's less than usual as well. So this could pressure growth on the top line for the rest of the year, maybe longer.

Cardina: Absolutely. My final question on Intuitive Surgical. This has been a pretty expensive stock before it did earnings. Last week it was trading at $777. After those eyebrows were raised, it dropped about $20 to today's price of $750. Would you say that this could actually be an attractive entry point for investors who have had their eye on Intuitive Surgical, or do you think it's maybe not quite a buy right now?

Renauer: At recent prices, it's trading at a high multiple that says the stock market is expecting a lot more sales growth than the company will probably report this year. If the stock market starts to think that the company won't continue the gains that they're used to in 2022, it could fall. But the important thing to remember is Intuitive Surgical is set up for decades of steady growth to come. Another slow year this year isn't going to stop this business from producing long-term gains over the next five years, decade, I think 20 years.

The company placed fewer systems in the fourth quarter than usual, but it placed over 900 new systems last year. At the end of 2020, there were 6,000 machines in use, installed around the world. That means not just the machines are there, but there are teams of surgeons that are trained and used to using them and they don't want to use something else. It takes time. There is a huge switching cost and there really aren't any competitors getting close to Intuitive Surgical. In other words, whatever is being put off, those surgeries are going to come back. Once it's smoothed out over the long term, the pressure now is going to dissipate. So I would still buy the stock at this price.

Cardina: Absolutely. Its competitive moat is still there. Like you said, high switching costs. It does have a nice razor and blade model where you buy the machines but you also buy the disposable parts. Like you said, it's not going anywhere.

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