Over the past 20 years, medical device giant Intuitive Surgical (ISRG -0.41%) has substantially outperformed the market. While the company's stock is currently struggling partly due to coronavirus-related headwinds, there are still excellent reasons to be optimistic about its future. In fact, over the next couple of decades, Intuitive Surgical has a shot at becoming the largest healthcare stock. Let me explain.
A quick look at the landscape
Currently, the two largest healthcare companies are pharmaceutical giant Johnson & Johnson, with a market cap of $433 billion, and insurance specialist UnitedHealth Group, whose market cap is $475 billion. The list includes other pharmaceutical companies such as Eli Lilly at $295 billion and Pfizer at $247 billion. Intuitive Surgical looks relatively small compared to these giants, with a market cap of "only" $66 billion.
But comparing the performance of all these healthcare stocks over the past two decades is instructive. For good measure, let's add the S&P 500 and the Health Care Select Sector SPDR, an industry benchmark.
Even considering its recent pullback, Intuitive Surgical has easily outperformed these other companies (and indexes) over the past 20 years. Of course, past performance is not necessarily an indication of what will transpire in the future.
But here is the point. If Intuitive Surgical can pull off a similar performance by comparison to its peers moving forward, it has a chance of becoming the largest company in the industry within 20 years. And there are good reasons why the medical device specialist can accomplish this feat.
Intuitive Surgical's exciting future
Intuitive Surgical's prospects are intimately tied to the growth of the robotic-assisted surgery (RAS) market. It stands as the leader in this industry, having developed the first RAS device to be cleared by the U.S. Food and Drug Administration (FDA), the da Vinci Surgical System, way back in the year 2000. Intuitive Surgical's performance in the past largely reflects the progress it has made in this space.
The company can continue growing provided there is continued growth in demand in the RAS industry. Investors should have nothing to worry about on that front. As of 2021, only 3% of surgeries were performed robotically. RAS allows physicians to perform minimally invasive surgeries, which substantially benefit patients. Compared to traditional open procedures, minimally invasive ones lead to less bleeding, less scarring, faster recovery, and shorter hospital stays.
The simple fact that this market is ripe for growth doesn't mean Intuitive Surgical will be the sole -- or even the main -- beneficiary. This kind of potential is bound to attract fierce competition, and the company can survive only if it can build a competitive advantage. Thankfully, that's something Intuitive Surgical has already done.
The company's moat comes from several sources. First, there is the value of intangible assets like patents that protect its products and grant it some pricing power. Intuitive Surgical held more than 4,200 patents in the U.S. and abroad as of Dec. 31, 2021. Second, the da Vinci system comes with high switching costs. The RAS device costs between $0.5 million and $2.5 million.
Training medical personnel to use the machine takes time. Healthcare facilities won't want to let this investment go to waste by switching to a competing platform unless absolutely necessary. As of the second quarter, Intuitive Surgical had an installed base of 7,135, representing a 13% year-over-year increase. Most of these customers are likely to stay put.
Intuitive Surgical does have competitors in this field -- most notably, Johnson & Johnson and Medtronic. Both companies have some catching up to do: Intuitive Surgical held a nearly 80% share of this market in 2020. Will they eat into Intuitive Surgical's leadership in the coming years? My view is that they will. But the market opportunity is more than vast enough to accommodate multiple winners.
It's also worth noting that the industry has high barriers to entry. Building a surgical robot is step one, and that's hard enough. Testing it and obtaining clearance from health industry authorities can take considerable time and money. Medtronic has yet to earn clearance for its Hugo system in the U.S., despite it having undergone testing and getting approved in other countries.
That speaks to the difficulty of breaking into this space, and it bodes well for Intuitive Surgical, which has already gone through all these regulatory hoops.
A great pick regardless
A lot can happen in 20 years. Intuitive Surgical could run into unforeseen issues in this period. Even if it doesn't, my prediction could fail to come true. Regardless, the medical device specialist has the tools a company needs to succeed in the long run. That's why buying shares of Intuitive Surgical today and holding onto them for a while would be a brilliant move.
