Have you ever been to the hospital for hernia, gallbladder, bariatric, or other general surgery? If so, you may have experienced minimally invasive, robotic-assisted surgery -- or wish you had. Robotic-assisted surgery is not an aberration; it will be the industry standard. Why not invest in a highly profitable, wide-moat company with an 80% market share?
Intuitive Surgical (ISRG 0.21%) is the world's leading provider of robotic-assisted surgical machines and parts. The company develops, markets, sells, and services the da Vinci Surgical System. It recently split its stock 3:1, the second such split since October 2017. This keeps the share price lower, which helps retail investors purchase shares and options.
Intuitive Surgical's da Vinci surgical unit provides several advantages for surgeons, patients, hospitals, and insurance companies. First, the surgery is minimally invasive, which leads to fewer complications, shorter recovery time, and less strain on the body. As a result, patients stay at the hospital for shorter periods and require less aftercare. The hospitals have less space occupied by recovering patients, and the insurance companies are on the hook for less money. It's a win-win-win-win! The stock has also been a major victory for investors, having grown more than 400% over the past five years, handily outpacing the market, as shown below.
The stock split 3:1 in October, the second such split since 2017. The stock has gained over 200%, a much better return than the overall market since that time.
Revenues are growing, but that isn't the best part
Intuitive has grown revenue steadily for many years. The pandemic was a bit of a setback, as many hospitals restricted elective or nonemergency surgeries; however, fiscal 2021 growth of 30% makes up for the slight 2020 downturn. Indeed, the compound annual growth rate (CAGR) from 2017 through the 2022 estimates is 15%.
As shown above, the pandemic knocked things out of whack in 2020, represented by the orange line. However, the long-term CAGR is still intact and impressive.
The most advantageous part of Intuitive's business model may be that the vast majority of its revenue comes from recurring sources. One might reasonably expect that most revenue would come from one-time sales of the da Vinci system, but that is not the case. Instead, the majority comes from parts and services. You see, the surgical system uses many parts that must be disposed of after each patient. This is often called the "razor-and-blades" model. Because of this, the company makes more money when more surgeries are performed. Non-emergency procedures met a headwind during COVID-19 because hospitals were occupied with so many COVID-19 patients. Still, the secular trend is positive given our aging population and the increasing demand for minimally invasive procedures. Robotic-assisted surgery is quickly becoming the industry standard rather than the exception.
Recurring revenues typically run near 70% of total revenues.
Dominating the marketplace
Intuitive holds a market share of 80% worldwide. Hospitals invest millions of dollars purchasing machines and training surgeons, making switching costs high and providing Intuitive's wide moat. To further penetrate the market, Intuitive has also begun to lease machines to hospitals that may not otherwise afford the system. These factors give the company tremendous pricing power, which leads to extremely high margins.
Intuitive has a net operating margin of over 30% on a trailing-12-month basis. The company's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is over 38% over this same period, which generates tremendous cash flows. Intuitive uses this cash to invest in both short-term and long-term investments. These investments, along with the cash on hand, equaled over 6.5% of the company's market cap in the last report. With interest rates likely rising in 2022 and beyond, the income from these investments will also rise, providing a small built-in hedge against rising rates. Intuitive has no long-term debt.
So what's the catch? The valuation on this stock is relatively high and likely to stay there. Due to the large cash balance, it is important to calculate based on enterprise value, which considers the strong balance sheet, rather than market cap. The stock currently trades at a forward-enterprise-value-to-EBITDA ratio of 49. This valuation is in the range of historical averages. By continuing to grow revenue at a CAGR of 15%, this stock could easily double in less than five years.
Is Intuitive a buy?
Intuitive has favorable long-term trends, but COVID-19 may continue to cause short-term headaches. The new omicron variant may stifle results if hospitals fill. Even so, Intuitive has the resources and clout to weather this potential storm, and this may provide an opportunity for long-term investors to accumulate shares on weakness. As seen with the revenue gain in 2021, a temporary slowdown simply causes a timing difference due to pent-up demand. The company's revenue, market share, and margins are top-notch. For investors looking for an innovative company, with high margins, growth, and cash, Intuitive Surgical checks all the boxes.