Investors are always looking for companies that are growing fast through innovation. It's a big reason Tesla is approaching an $800 billion valuation and its stock is up 1,500% in the past two years. But at that size, it's fair for investors to wonder just how much more innovation the company has to offer. And if it can drive market-beating returns.
That's why we asked three contributors to Fool.com for a company they think can outperform Elon Musk's innovation machine over the next few years. They chose Moderna (NASDAQ:MRNA), Intuitive Surgical (NASDAQ:ISRG), and Idexx Laboratories (NASDAQ:IDXX). Here's why.
A scientific revolution in medicine
Jason Hawthorne (Moderna): When Moderna went public in late 2018, it was the biggest biotech initial public offering in history. Despite the many programs in its pipeline, no drug using messenger RNA (mRNA) had ever been approved by the U.S. Food and Drug Administration. At the time, it sounded like science fiction. The company aimed to use mRNA as "the software of life" to program cells, instructing them to make whatever proteins served the needed function in the body.
A little more than a year later and the company had designed a vaccine that would prove to be the most effective weapon in the fight to slow a global pandemic. Incredibly, it was able to design the drug just two days after the genome sequence of the virus was made public.
Because of that, Moderna's vaccines for infectious diseases are now widely known. What many don't know is that the company has 26 candidates in its pipeline to treat cancer, cardiovascular and autoimmune diseases, and rare diseases. It is developing what management believes will be an entirely new class of medicines.
While the science takes center stage, the company has also been innovating on the manufacturing side. It employs artificial intelligence and machine learning to minimize failures and optimize the manufacturability of its mRNA sequences. AI is one of its six building blocks of its digital infrastructure. The others involve process integration and synchronization, along with cloud-based data analytics and automation.
Often, success generates criticism. And Moderna is not immune. The company has come under fire for supplying few COVID-19 jabs to low-income countries. It has sent a larger percentage of its doses to wealthy nations than any other vaccine maker according to data analyst Airfinity. To that end, U.S. officials have reportedly been pressing the company to license its technology to overseas drug makers to increase production.
It's unlikely to happen. But the company recently said it plans to open a facility in Africa to increase access for poorer nations. So far, there is no public timeline for the project. Given the central role the government played in supporting Moderna's vaccine development, the company's reluctance could affect future deals.
Still, mRNA-based drugs represent a potential seismic shift in the global $1.3 trillion pharmaceutical market. Similar to electric vehicles and renewable energy, humanity may one day look back on this era as a turning point in how we use technology to improve the quality of life for our species. If so, Moderna could be near the top of the list of companies that led the revolution.
An unchallenged leader in surgical robotics
Rachel Warren (Intuitive Surgical): Healthcare stocks aren't always known for being high-growth investments. Rather, the allure with these types of companies is that they tend to lend considerable portfolio value over time by nature of being generally resilient in a wide range of market environments and facing consistent consumer demand. That being said, there are always exceptions to this rule, and Intuitive Surgical is a prime example. The leading developer and manufacturer of surgical robotics products has an astounding track record of delivering momentous balance sheet growth and market-beating share price returns.
Intuitive Surgical is known primarily for its da Vinci Surgical Systems, which are used in all types of minimally invasive procedures from general surgical procedures to cardiac procedures. The company raked in $1.5 billion in revenue in the second quarter of 2021 alone, a 72% spike from its revenue during the same period in 2020 when surgical procedures were deferred worldwide amid lockdowns and surging case numbers.
The company has displayed a strong ability to rebound from pandemic headwinds. In the second-quarter report, management noted that the company's installed base of da Vinci Surgical Systems was up 10% year over year. Also, shipments of its da Vinci Surgical Systems surged 84% from the year-ago quarter. Best of all, Intuitive Surgical's net income popped an incredible 660% year over year.
Intuitive Surgical recently underwent a 3-for-1 stock split. Even so, shares are currently trading more than 300% higher than just five years ago, about double that of the S&P 500's gains in the same period of time.
The global surgical robotics market, which is valued at $3.6 billion as of 2021, is set to nearly quadruple in valuation to $14 billion by the year 2028. As the top maker of surgical robotics in the world that controls a roughly 80% share of this multi-billion-dollar market, it's safe to say that Intuitive Surgical's ability to produce long-term business growth and investor returns is far from exhausted. In fact, investors may just be seeing the very early stages of the long-term growth potential that Intuitive Surgical has to offer.
If you want to invest in a great company with a strong business that can deliver robust portfolio returns and sustain growth over the long term, this top stock could easily be the Tesla of healthcare.
Making big bets on pets
Steve Ditto (Idexx Laboratories): The pandemic led to a baby boom with fur as people stuck at home turned to pets for companionship and a welcome distraction. That trend has not abated as the global pet market has continued to grow. One big beneficiary of this trend has been Idexx Laboratories.
Although Idexx may not be a household name, the company is a leading global provider of healthcare services to veterinarians. Idexx provides the diagnostic testing equipment, supplies, and services vets need to help keep pets healthy. These positive market trends have been reflected in Idexx's recent stock price. Since the start of the year, Idexx returned 23% compared to 17% for the S&P 500 and 14% for Tesla.
It's no big surprise pet owners are treating their pets like family members. Rather than waiting until they get sick, many pet owners are even taking their pets for "wellness visits" as a preventative measure to catch early signs of trouble. Once seen as a luxury, diagnostic tests like bloodwork are becoming a part of most pet visits. Idexx has historically provided reference lab services for vets wanting to outsource diagnostic testing. Increasingly, vets are using Idexx equipment to provide diagnostic testing in-house as the equipment has become smaller, faster, and more affordable.
Idexx's companion animal group, or CAG, accounts for 90% of its revenue. The company is seeing strong growth from international markets, with customers in more than 175 countries, and it expects further international expansion to help fuel the company's growth. Management sees the global diagnostic market growing at 9% annually.
Idexx is translating these market tailwinds into profitable growth. In the second quarter, revenue increased 30%, operating profit increased 30%, and earnings per share increased 33% compared to the previous year. CEO Jonathan J. Mazelsky commented on the results in the earnings release, saying, "The Idexx team delivered another quarter of outstanding performance, reflected in continued high growth in CAG Diagnostics recurring revenues and accelerated gains in instrument placements, as the global animal healthcare sector sustained strong growth momentum globally."
Both Idexx and Tesla are richly priced with a price-to-sales ratio over 16 but Idexx may be the better value with price-to-earnings of 74 versus 423 for Tesla. For long-term buy-and-hold investors, Idexx has plenty left in the tank for profitable growth for decades to come.