Medical-devices giant Intuitive Surgical (ISRG -0.41%) is one of the more prominent companies in its industry. Over the past 20 years, it has consistently delivered above-average returns. The healthcare giant owes this performance to its robotic-assisted surgery (RAS) device, the da Vinci System.
But even top companies face risks, and it's vital to know these risks before investing in them. What could go wrong for Intuitive Surgical? Let's look at what the bears say about the company -- as well as what the bulls reply -- and decide whether the potential upside of Intuitive Surgical outweighs the risks.
The bear case
Intuitive Surgical has built a solid lead as an RAS specialist over the past couple of decades. Its revenue and earnings grew substantially in this period, as well. The bears may feel that there's only so much room left for Intuitive Surgical to keep growing. In 2020, it held a nearly 80% share of the RAS market.
Further, Intuitive Surgical will increasingly face tough competition in this space. For instance, medical-devices giant Medtronic developed a device to compete with Intuitive Surgical's da Vinci System. Medtronic's robot is called the Hugo system. Medtronic isn't the only company on Intuitive Surgical's trail. Johnson & Johnson will also be competing in this market thanks to its RAS product, Ottava.
These competitors could eat into Intuitive Surgical's market share. On top of that, the company doesn't look attractively priced right now, and that's after its shares recently have dropped substantially. Intuitive's forward price-to-earnings (P/E) ratio of 44.5 is higher than the healthcare sector's average of 15.4 and the S&P 500's multiple of 19.4.
The market could continue to punish Intuitive Surgical severely if it doesn't live up to expectations.
Image source: Getty Images.
The bull case
Although Intuitive Surgical has made significant headway in the RAS market over the past two decades, there arguably remains plenty of room to grow. Last year, Medtronic estimated that only about 3% of surgeries worldwide are performed robotically. But the minimally invasive surgeries physicians can perform, thanks to robot assistance, boast several advantages compared to traditional open surgeries.
Minimally invasive surgeries typically come with fewer incisions, less bleeding, faster recovery times, and shorter hospital stays for patients. That's why the RAS market will likely continue to grow, and Intuitive Surgical can remain one of the leaders in this field thanks to the competitive edge it has built around its business. The da Vinci system costs between $0.5 million and $2.5 million.
After spending that much money on the device, healthcare facilities need to spend hours training their staff to use the machine. These facilities are unlikely to jump ship after investing so much time and money into one system. And that's not to mention the regulatory barriers to entry into the industry. Developing and marketing medical devices requires years of testing to acquire proper regulatory clearance (that's after building the device itself, which is not an easy task).
Newcomers will have a hard time seriously challenging Intuitive Surgical. Lastly, the company has already successfully built a solid reputation in the RAS market, thanks to being the undisputed leader in this field. Physicians are like everyone else: They tend to stick to products and brands they know and trust. That's excellent news for the future of Intuitive Surgical.
The verdict
I see Intuitive Surgical's bull case as stronger than the bear one. First, the company continues to record strong financial results after all these years.
Intuitive Surgical's revenue increased by 15% year over year to $1.49 billion in the first quarter. The number of da Vinci procedures grew by 19% during the quarter, and the company ended the period with 6,920 installed systems, 13% higher than the year-ago quarter. On the bottom line, Intuitive Surgical's net earnings per share decreased from the $1.17 reported during the year-ago period to $1 this time around.
The company continues to deal with pandemic-related headwinds, which have impacted procedure volume. But overall, it was a solid quarter for Intuitive, especially considering these (and other) issues outside its control. Second, even though the competition is heating up, there's more-than-enough room in this space for more than one company to be highly successful.
Intuitive Surgical's competitive advantage is strong enough for it to remain a leader in the field. While it's true that the company's shares look overvalued, they're worth a premium.
The healthcare giant will justify its richer valuation metrics in the long run. That's why I'm sticking with Intuitive Surgical and don't intend to change my stance anytime soon.
