Intuitive Surgical (ISRG -0.50%) makes robotic surgical suites that human surgeons control in the operating room during minimally invasive procedures. And as its market-slaying total returns of more than 353% since 2013 show, it pays to invest in businesses that are aggressive innovators in a newly emerging field.
Its razor-and-blade business model involves selling its robotic surgical suites to hospitals, which then buy replacement robotic tool heads and maintenance contracts, thereby generating recurring revenue. By constantly investing in research and development activities, the company consistently launches new accessories and tools that expand the capabilities of its robots.
There's every indication that management is set on continuing this successful strategy through 2030. In my view, that's great news for investors, and there are two financial metrics worth understanding that spell out exactly why and how.
Image source: Getty Images.
Reinvest for success
One of the keys to this company's success is that it keeps its earnings in the company rather than repaying debt or distributing them to shareholders through dividends or a share-repurchase program. Keeping earnings in-house is a move that is explicitly favored by legendary investor Warren Buffett -- and there's a reason for that, which I'll get into a bit later.
Retained earnings are also key to understanding why this business is going to keep thriving. In the past decade, Intuitive grew its hoard of retained earnings by quite a bit with every passing year:
ISRG Retained Earnings (Annual YoY Growth) data by YCharts
That means the company has a longstanding habit of reinvesting its proceeds into growth in the form of productive capital or acquisitions at a larger and larger scale over time. And Intuitive is doing even more of it since it launched a $100-million-dollar venture capital fund devoted to investing in minimally invasive care companies in late 2020.
It'll take some time for those venture capital efforts to bear fruit in the form of cash returns from new technologies or products, but if the company's record of successful execution is any indication, the payoff will be big. In the last five years, Intuitive's net income has grown by more than 154%, reaching $1.7 billion in 2021; its revenue also expanded by nearly 82%, hitting over $5.7 billion.
Returns like these are hard to find
In fact, Intuitive's ability to convert investments into cash flows is a second major reason why it'll cruise through the 2020s. Its annual cash return on invested capital (ROIC) is quite high, and rebounding after a few years of decline:
ISRG Cash Return on Capital Invested (CROCI) (Annual) data by YCharts
In other words, the company is going to keep being able to wring nearly 16% more money from its committed capital than it puts in each year. When paired with its ever-growing pool of retained earnings, there's a significant amount of value compounding going on, which is why Buffett is such a stickler for retention.
Over long timescales, that value compounding will pay off more and more, especially when considering the relatively high returns. Don't forget: Intuitive has been retaining its earnings and reinvesting them at an attractive rate for years and years already, and there isn't anything standing in its way from doing more of the same.
For investors, that implies two takeaways. First, new entrants to the robotic surgery market won't have anywhere near the base of accumulating capital that Intuitive does. That makes them less likely to win in head-to-head competition with Intuitive, and it also might make them easier to simply acquire if they do become threatening.
Second, though it's one of the largest healthcare companies in the world, Intuitive is still maturing in its growth phase, as its investments are yielding a high rate of cash returns. If its retained earnings could only be reinvested for declining returns relative to its historical rate, it'd be a sign that the business might shift toward returning capital to investors in the form of dividends or share buybacks.
So, don't get too impatient about getting your cut; this stock has a long way to run first.
