In the past year, it seems investing has gotten blended with entertainment. Perhaps that was inevitable. Many options for amusing ourselves were unavailable due to the pandemic. Maybe investing has always been partially entertainment. After all, Warren Buffett's mentor Benjamin Graham once said that investing is most successful when it is most businesslike. It doesn't take a lot of imagination to guess what he would have thought of meme stocks and cryptocurrency.
Another investor with a close relationship to the Oracle of Omaha takes it one step further. Charlie Munger has said investors can gain a long-term advantage not by being intelligent, but rather by being consistently not stupid. That is typical Munger: blunt and useful.
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With that in mind, let's dig into a couple of stocks that seem like no-brainers for the next several years. Intuitive Surgical (ISRG -0.50%) and Illumina (ILMN -1.48%) have generated huge returns over the past two decades, and each has a dominant market position and impressive financial metrics. Buying shares in these two healthcare winners may be the least stupid thing an investor can do.
1. Intuitive Surgical
What started out twenty years ago as a way for surgeons to perform robotically assisted prostate removal has evolved into a platform for many different kinds of procedures. That platform consists of multiple devices, consoles for controlling them and seeing the surgical field in three dimensions, and a cart to integrate and power the various components. The average selling price of Intuitive's da Vinci robots has remained around $1.5 million over the past decade. However, revenue generated from its portfolio of instruments and software is what really excites investors. That's because each da Vinci generates about $600,000 of recurring revenue per year once installed.
Despite the global pandemic, the company grew its installed base of devices 7% in 2020 to 5,989. Although overall revenue dropped last year, declining 3%, in the three previous years it had grown from $2.7 billion to $4.5 billion, compounding 18% annually. The company just reported first-quarter earnings, and business appears to be back on track. Year-over-year sales climbed 18% to $1.29 billion, and procedure volume rose 16%.
That return to normal will be music to the ears of potential competitors as well. Several small companies in Asia are attempting to replicate Intuitive's success, as are leading device makers like Johnson & Johnson and Medtronic. Any threat from Johnson & Johnson is likely a few years off, as it isn't expecting to begin human trials until the second half of 2022. Medtronic expects to have its device in hospitals gathering data this year.
With the recovery in surgeries and placements of da Vinci systems, uncertainty from the pandemic is in the rearview mirror. Innovation has led to advances in equipment, new devices, and an ever-growing slate of possible procedures. The trajectory should keep the addressable market expanding and Intuitive's position as the industry leader intact. Despite new entrants, only about 15% of procedures in the U.S. (and less than 3% globally) are performed robotically. That should offer plenty of room for growth despite the competition. Hindsight may show there were a lot of things an investor could do with their money in 2021 that weren't very smart. Buying shares of Intuitive Surgical is not likely to be one of them.
2. Illumina
When Illumina went public in 2000, the cost to sequence a single human genome was over $100 million. Thanks in large part to the company's innovation in sequencing instruments, that number has dropped precipitously. It is now closer to $1,000. That's why Time magazine recently named Illumina among the 100 most influential companies. As with most technologies, when cost falls that dramatically, adoption skyrockets.
The company has been the big winner in that trend with 2020 revenue of $3.2 billion. As with Intuitive Surgical, that was lower than 2019's revenue due to the pandemic. Also similarly, management's first-quarter earnings report should allay any concern about how long it will take for growth to resume. In that first quarter, revenue accelerated, growing 27% year over year to $1.1 billion. It was the first $1 billion quarter in the company's history and demonstrated strength across all customer types and geographies.
Although Illumina has 75% market share in the sequencing market, it does face the threat of being leapfrogged in some applications. Improvements in long-read sequencing -- reading the whole gene or complex elements -- has been gaining traction, and competitor Pacific Biosciences is the leader in this niche. PacBio, as it is known, had languished for years before the recent launch of its new sequencing system. In late 2018 Illumina tried to thwart the advance by purchasing PacBio for $1.2 billion. The deal was scrapped two years later after it became clear regulators around the globe and at home were opposed to the acquisition out of fear that the combination could wield monopoly power. Another competitor, British firm Oxford Nanopore, is planning to go public later this year. It hopes to access capital to expand the production of its $1,000 handheld sequencing device.
The good news for Illumina shareholders is that the market is expanding rapidly. The cheaper sequencing becomes, and the more technologies exist, the more use cases become available. The DNA sequencing industry is expected to grow from the current $8.4 billion to $40 billion over the next decade. That leaves room for a lot of winners. With dominant market share and two decades of innovation behind it, don't expect Illumina to stand still. For investors looking to ride the growth in genome sequencing, the largest, strongest horse with the best track record should be a smart addition to a portfolio.
