Growth stocks have received much of investors' ire throughout the current market downturn. With economic problems such as inflation lurking, investors are increasingly investing their money in safer companies rather than growth-oriented ones. The latter seem overvalued and sometimes generate no profits.
Yet, many growth companies still have bright futures. Let's look at two excellent examples: Intuitive Surgical (ISRG -0.55%) and DexCom (DXCM 2.89%). These two medical device giants have both performed poorly over the past year, but which is more likely to outperform the other in the long run?
The case for Intuitive Surgical
Intuitive Surgical is the leader in the robotic-assisted surgery (RAS) market, thanks to its crown jewel, the da Vinci surgical system. This machine allows physicians to perform minimally invasive surgeries that are much easier on patients than traditional operations. The great thing about Intuitive Surgical's business is the growth potential that the RAS market boasts.
Minimally invasive surgeries still make up a small fraction -- only 3% as of last year -- of the total performed. That proportion will surely rise in the coming decades, providing plenty of fuel to fire up Intuitive Surgical's growth engine. And the company can remain a leader in this space, given the competitive edge it has already built.
The da Vinci system costs between $500,000 and $2.5 million, a hefty sum for many healthcare facilities. Combining that cost with the time investment of training medical personnel on the machine, hospitals that have already bought da Vinci systems are reluctant to switch to a competing RAS system.
Also, breaking into the industry is highly capital-intensive. Furthermore, the medical devices specialist boasts intangible assets -- in the form of patents -- that protect its devices and accessories from the competition. These factors are why Intuitive Surgical should remain a leader in the RAS market.
Investors might be concerned about some of Intuitive's top executives recently selling some of their shares. The market often sees such moves as a bad sign. But unless they're related to a change in the company's fundamentals -- and we have no reason to believe they are -- then these recent sales mean little to Intuitive Surgical's long-term thesis.
And as things stand, the company's prospects look attractive, thanks to its leadership in an expanding industry. That's why I think Intuitive Surgical is a buy.
The case for DexCom
DexCom is a leader in continuous glucose monitoring (CGM) systems. These innovative devices allow people with diabetes to perform an important task more efficiently: keeping track of their blood glucose levels. Diabetes patients typically rely on blood glucose meters, which are painful to use and can only read a blood glucose level at a particular time.
CGMs are much better. These devices don't rely on painful finger sticks, and continuously keep tabs on patients' blood glucose levels. CGM devices can make up to 288 readings every day, or one every five minutes. The growth in the use of CGM systems has helped DexCom increase its revenue over the years, but the company still has a bright future ahead.
Consider that the percentage of the population with diabetes is growing. By 2050, about 1 in 3 adults in the U.S could have diabetes, compared to just 11.3% of the population now. That gives DexCom plenty of room to increase its revenue and profits as its CGMs make their way deeper into this growing population.
Even within the current pool of diabetes patients, CGM technology still has substantial room to grow. DexCom will also improve its prospects as it develops newer devices. The company has already launched the G7, the successor to its very successful G6, in some parts of Europe, and the G7 awaits clearance in the U.S.
As a leader in CGM technology, DexCom is in an ideal position to benefit from the long-term opportunity this market presents.
Two robust companies
In my view, Intuitive Surgical and DexCom both seem like solid picks due to the opportunities ahead for both. Which one should investors pick?
At first glance, DexCom may look like the better growth stock. DexCom has generally grown its top line (on a year-over-year basis) faster than Intuitive Surgical in the past five years. However, Intuitive's revenue as of the latest period is still more than twice that of DexCom. And that's in addition to Intuitive Surgical's much higher bottom line:
ISRG Revenue (Quarterly) data by YCharts.
However, DexCom's higher revenue in recent memory also puts a premium on its shares, with its forward price-to-earnings ratio coming in much higher than Intuitive Surgical's. DexCom's shares could become much more volatile due to its steeper valuation metrics, especially since its revenue growth has slowed. That's one of the reasons why, if I had to make a choice, I'd think Intuitive Surgical was the better pick.
Another argument in favor of Intuitive is its (in my opinion) stronger moat. The combination of high switching costs and its intangible assets, coupled with high barriers to entry into the market, makes it nearly impossible to topple Intuitive Surgical from its leadership position in this space.
With that said, both of these growth stocks look like solid long-term winners, and investors can't go wrong with either one.
