Intuitive Surgical (ISRG +1.14%) has been a company investors can count on over time. It's steadily grown revenue and profit -- into the billions of dollars. Intuitive is the leader by far in the global robotic surgery market. And shares have more than doubled over the past five years.
But recent times have been tough for this healthcare star. The coronavirus pandemic has weighed on procedure volumes as hospitals postpone surgeries. The stock has fallen about 40% so far this year. The latest bad news is the company posted a 15% decline in surgical system installs in the second quarter. Should you worry about this number? Let's find out.
The placement of surgical systems
Intuitive generates revenue through the placement of surgical systems, the sales of accessories needed for the procedures, and maintenance contracts for the machines. The flagship Da Vinci system is used for various types of minimally invasive surgery from urology to hernia repair. Each system placed isn't just revenue on the spot -- but it's recurring revenue from accessories and services sales. So, a decline in system placements represents a good deal of revenue lost.
But before we rush off to sell Intuitive shares (or decide not to buy the stock), let's consider why installs fell. Intuitive offered a few reasons during its earnings call.
First, the company said it has to do with fewer trade-ins for the latest Da Vinci. That's because most hospitals now are using the fourth-generation system. So, there's less trading up from third generation systems to fourth.
Second, supply chain disruptions meant delays on the delivery of semiconductor components. Intuitive needs these to build the Da Vinci. As a result, Intuitive couldn't fill certain orders by the end of the quarter.
And finally, hospital spending is under pressure because of economic headwinds, Intuitive says. That means hospitals aren't ordering new systems as readily as they might have during easier times. Instead, they're sticking with current devices for as long as possible.
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Key Data Points
A growing market
Of course, we'd all love to see growth in installs. But what's most important now is that these declines aren't linked to other players gaining market share -- or a general movement away from robotic surgery. In fact, the robotic surgery market is set for more growth. At a compound annual growth rate of 10%, it's expected to reach more than $16 billion by 2031, according to BIS Research. And Intuitive holds a nearly 80% share of the market, the data show.
The best news of all is: None of the reasons for placement declines signal a lack of demand for Intuitive's product.
What does this mean for the company -- and for investors? Intuitive's drop to 279 placements in the second quarter from 328 in the year-earlier period isn't reason for alarm. Yes, it's a headwind right now. But this looks like a temporary problem.
The trade-in situation is part of Intuitive's business -- and it's likely to happen at certain points in time when most clients have upgraded to the latest system. Supply chain issues and lower levels of hospital spending are elements linked to today's economy. And that means they won't be problematic forever.
So, I wouldn't expect this decline in installs to hurt Intuitive's long-term prospects. Especially considering procedure demand has been climbing -- even as the pandemic has kept it down to a certain extent. Procedures rose 14% in the second quarter.
This is good news for Intuitive investors and those who consider buying the shares. Even if the company is traveling through a rough patch right now, it's still on the right path. And this path is likely to keep delivering earnings growth over time -- and share gains.
