COVID-19 shut down many aspects of life over the past couple of years, including the availability of major healthcare services. People had to postpone their surgeries, slowing the growth of Intuitive Surgical (NASDAQ:ISRG), a leader in robotic-assisted surgeries. A lukewarm growth forecast for 2022, amid a market revolt against high-growth stocks, has sent Intuitive's shares tumbling by over 20%. The business fundamentals for Intuitive Surgical, however, look as promising as ever, and now may be a good time for long-term investors to take a closer look at this business for three key reasons.
A win-win-win situation with robotic-assisted surgeries
The demand for healthcare and surgeries is growing as people live longer and the population in the US and many parts of the world ages. Additionally, there are not enough doctors and healthcare workers to meet the growing need for patient care. Hospitals are looking to adopt technologies such as robotics to reduce the strain on human resources, and provide timely and quality care for patients.
Intuitive Surgical, founded in 1995, is a leading innovator, designer, and producer of robotic equipment used in surgical procedures. The company's flagship product, da Vinci, has become the standard in the industry. Using da Vinci's 3D high definition cameras and advanced surgical tools, surgeons can perform complex procedures with exceptional precision, even in areas of the human body that are difficult to reach with traditional open surgery.
Image source: Getty Images.
Additionally, robotic-assisted surgeries are minimally invasive -- meaning smaller incisions, less bleeding, and less scarring -- and lead to quicker recovery periods, shorter hospital stays, and less aftercare.
Adoption of robotic-assisted surgeries benefits patients, healthcare workers, and hospitals, and it's a major tailwind for Intuitive Surgical.
An undisputed industry leader
Intuitive Surgical pioneered robotic surgery. As of the end of 2021, the company has sold over 6,700 da Vinci systems, with which its customers have performed over 10 million procedures. Over the years, Intuitive Surgical's innovation has expanded the types of surgeries it can support, including abdominal and digestive, colorectal, cardiac, and gynecological procedures. The company has steadily grown the sales of da Vinci, and its customers have performed more and more procedures using da Vinci, even in 2020, when hospitals shut down and many patients postponed their surgeries because of the COVID-19 pandemic.
| da Vinci Systems and Procedures | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|
| Total systems (installed base) | 4,409 | 4,986 | 5,582 | 5,989 | 6,730 |
| Year-over-year growth in installed base | 13% | 13.1% | 11.9% | 7.3% | 12.4% |
| Procedure volume (in thousands) | 877 | 1,038 | 1,229 | 1,243 | 1,594 |
| Year-over-year growth in volume | 16.5% | 18.3% | 18.4% | 0.1% | 28% |
SOURCE: COMPANY EARNINGS RELEASE
In 2019, the company went beyond the surgery market and expanded into diagnostics with the introduction of Ion, which enables minimally invasive lung biopsies. The company is looking to broaden Ion's applications, further growing its opportunity. Intuitive Surgical has innovated relentlessly over the past two decades, and is protecting that innovation with over 4,000 approved and 2,000 filed patents, creating a big moat for the business.
The company also creates sticky relationships with its customers once it gets its foot in the door. The company's da Vinci systems cost anywhere between $500,000 and $2.5 million, a sizable investment for hospitals. Add to that the time and effort of training the surgeons and the medical staff. Finally, once surgeons are used to conducting procedures with the Da Vinci system, they don't want to go to older ways of performing surgeries or other systems. Once hospitals buy Da Vinci, they're locked in, and are also likely to purchase newer versions of it along with other products the company has to offer. All of the 93 Ion systems the company sold in 2021 were purchased by its existing customers who own da Vinci.
A resilient business with steady growth, profitability, and stellar balance sheet
Driven by steady sales of da Vinci and increasing surgical procedures, Intuitive Surgical recorded $5.71 billion in revenue for 2021, up 82% over the past five years despite COVID-19 slowdowns.
Intuitive Surgical uses a razor-and-blade business model: Each da Vinci or Ion system sold creates recurring revenue, as hospitals keep ordering higher-margin proprietary surgical accessories, instruments, and services. Since 2015, 70% to 75% of the company's annual revenue has been recurring. The company has also been consistently profitable, and has $8.6 billion in cash and no debt.
Is the current pullback in the stock price a buying opportunity?
Like many tech stocks, Intuitive Surgical has taken a beating over the past couple of months, further fueled by the company's lower-than-expected guidance of 11%-15% growth in surgical procedures for 2022. It is possible that the company is being conservative, but investors should account for possible near-term COVID-19 headwinds.
Another point to note is the growing competition for Intuitive Surgical. Medical device stalwarts such as Medtronic and Johnson & Johnson are aspiring to grow in this space, but are still in the early stages. Intuitive Surgical's early entry gave it a commanding lead, but the company will have to continue innovating to keep it.
Shares of this high quality business are rarely cheap, but they're currently trading at a relatively lower P/E valuation as investors fret over Intuitive Surgical's short-term headwinds. For business-focused investors with long term time horizons, now may be a great time to invest in this winner.
ISRG PE Ratio data by YCharts
