Should Intuitive Surgical Investors Be Worried About Competition?

Intuitive Surgical (ISRG -0.50%) has dominated the surgical robotics market for nearly three decades. But with more companies delving into this space, could Intuitive Surgical end up relinquishing some of its market share over the next few years? In this segment of Backstage Pass, recorded on Oct. 19, Fool contributors Clay Bruning and Brian Withers discuss this question and go over some key highlights from the company's third-quarter earnings results. 

Clay Bruning: A couple other things to note, they did execute on a 3-to-1 stock split so that daunting $1,000 or so price tag, that Intuitive was trading at previously before Oct. 5, I believe, has now been cut down.

I think it's around $335 or so last time I checked just to make the company a little bit more accessible to the masses. Then the only other notable thing that caught my eye was they created two new internal organizations to focus on both robotic-assisted minimal invasive care.

One unit was their strategy and growth segment. Then similar to that note, was their global business services. I think these two units will be very much so intertwined, and that the global aspect and international expansion is going to be a very strategic avenue of growth for this company moving forward.

They named a new chief strategy officer, chief growth officer, chief commercial officer, and then within the segments, I believe they named a new CFO as well. Not the great quarter, not the best quarter, but I think to an extent somewhat expected last time I checked they were essentially flat after hours. Some bumps in the road here with the COVID resurgence, but I don't think that is a blindside for investors, I think that was somewhat expected.

Brian Withers: Yeah. Clay, as we saw from Johnson & Johnson similar themes. But I take the shipments as a very positive sign, not necessarily year-over-year because it's hard to judge the lumpiness, but quarter-over-quarter actually an increase over last quarter's shipment sales.

That says the hospitals are getting back to thinking about doing business as normal and spending money. These systems aren't cheap. I imagine these, I always looked at the shipment sales as a positive that will pay out for years to come.

Bruning: Yeah, super sticky product. I think the last time I came on to talk about them, I showed a graphic where it's the number of hospital or healthcare related organizations with seven or more installed system. It's pretty much been up and to the right, as they install more units, that's I think more indicative of where this company will go long term.

Because more shipments means more installed units, which is going to over the long term increase the instruments and accessories recurring revenue side of things. I think that's the most encouraging thing, and the most discouraging thing was procedure volume. But again, somewhat expected with the global resurgence of delta especially here in the U.S.

Withers: I like that they report that number every quarter, and it's not necessarily something that they control, but it's a good gauge on the activity in the segment. There is one question here, Clay, before you head out, RH says, "Intuitive Surgical is an amazing profit growth machine. The recently delivered units hint for continuous expansion," which we just talked about. [laughs] He also mentioned that he likes that they don't pay a dividend. [laughs] Do you see anyone in their neck? I guess just meaning in their industry to stop them.

Bruning: There are a couple of companies that are starting to penetrate the space. Their patents I think, over the last couple of years have started to expire. I know Johnson & Johnson has been trying to penetrate the space. I don't think they've done so very successfully, I think they've had a decent amount of bumps in the road. Granted I haven't checked in on that on a couple of months.

Then you have companies like Medtronic. There's certainly companies trying to penetrate the space. But to me you have a company in Intuitive that has a 20-year head start thanks to their patents, it's going to be pretty tough to catch up to the experience, the relationships, etc. that they have with a lot of these hospitals, not only in the U.S., but globally.

Some of the most advanced medical markets like South Korea, the U.S., and Germany. When I think about the growth, I think about those three countries, for example, being some of the more technologically advanced countries.

I just imagine five, 10 years in the future as more countries are becoming developed, trying to increase efficiency within the healthcare system, via better outcomes and surgery, and lower complication rates, it just makes sense that they would be increasingly utilizing Intuitive Surgical.

It's possible that Johnson & Johnson with all their resources, same goes for Medtronic, they can start penetrating in this space. But I don't see that in the next couple of years personally.

Withers: They are just an amazing company. I remember I bought them in 2009 and unfortunately, I'm no longer a shareholder. The last year the stock chart really doesn't tell the story here.

It's been a rough year for Intuitive, and the fact that it's kept up with the market growth over the last 12 months is pretty impressive. Another great quarter for another solid company. Anything to wrap up Clay?

Bruning: No. I think thing I'll be looking forward to the next couple of quarters. Obviously that procedure growth. Hopefully that ticks up into the mid-high-20s for some of that pent-up demand post-delta variant easing. Then like we talked about, shipments are going to be important for this company because that's indicative of a longer-term growth.

Withers: Awesome. Thanks so much for the update. Appreciate you coming on.

Bruning: Thanks for having me on Brian.