The COVID years have been difficult for surgical robot specialist Intuitive Surgical (ISRG -0.50%). Its business experienced severe disruptions early on in the pandemic as the number of medical procedures performed with its robot-assisted surgery devices dropped.
And although that headwind eventually subsided, at least in most countries, Intuitive Surgical then had to deal with the same economic issues affecting everyone else, including inflation and supply chain problems, all of which slowed placement of its signature da Vinci systems in hospitals.
Still, Intuitive Surgical's shares have sharply outperformed the broader market over the past five years -- even with some ups and downs. So can the company's market-beating performance continue?
The market opportunity
Intuitive Surgical generates money from several sources. First, it sells its da Vinci systems to healthcare providers. Second, it sells them the disposable instruments and accessories that those machines require for the procedures they perform. More surgeries performed using the da Vinci systems thus means more money for the company.
These two sources of revenue -- especially the second -- provide the lion's share of Intuitive Surgical top line. However, it also makes money by performing various services for its clients, including repairing its devices.
The company's future largely depends on the growth in popularity of the robot-assisted surgeries. The more physicians and hospitals choose to make use of robotic surgery systems to serve the needs of their patients, the more companies like Intuitive Surgical will be able to grow their revenue and profits.
And the good news is that there is plenty of room for growth here due to the benefits of minimally invasive procedures robotic surgeries help provide, including less scarring and faster recovery times. It is also the case that with an aging population, there will be greater demand for various surgical procedures in the future.
Analysts at Grand View Research have forecast that the robot-assisted surgery market will grow at a compound annual rate of 19.3% through 2030. Precise estimates aside, this industry appears to have a bright future, something that will benefit Intuitive Surgical.
Solid financial results
Although macroeconomic conditions are not friendly right now, Intuitive Surgical is producing decent results. In 2022's third quarter, its top line increased by 11% year over year to $1.56 billion. The number of Da Vinci procedures performed grew by 20% year over year, and the company's installed base of da Vinci systems was 7,364 as of the end of the quarter, 13% higher than a year earlier.
Intuitive Surgical's adjusted earnings per share came in at $1.19, the same as the third quarter of 2021. But the company's revenue and net income have been growing at a good clip for years.
ISRG Revenue (Quarterly) data by YCharts.
Intuitive Surgical is in an excellent position to continue delivering strong financial results, especially considering its strong moat. For one thing, healthcare facilities have to make a massive investment to acquire a da Vinci system -- anywhere from $500,000 to $2.5 million. Moreover, surgeons must devote a lot of hours to technical training on them. Switching to a different robotic surgery system would mean first buying another expensive device and then more training. That's why it's easier for medical facilities that own da Vinci systems to stick with them.
The company also benefits from intangible assets in the form of patents that help protect its invention, at least for a while. Intuitive Surgical's combined competitive advantages make its stock even more attractive.
An excellent option, with one caveat
Intuitive Surgical has some of the tools a company needs to be successful in the long run. It is a leading player in a rapidly growing industry, generates consistent revenue and profits, and has a competitive moat. But companies that display these characteristics often garner a lot of attention from the market, which can bid up their share prices to levels that look expensive by traditional metrics.
Intuitive Surgical currently trades at a forward price-to-earnings ratio of 56, compared to the S&P 500's average of 18.8 or the healthcare industry's 17.4. Intuitive Surgical's pricey valuation is something to consider before making a decision about buying shares, but the company's stock price is much lower than it was in early 2021. In my view, Intuitive Surgical will more than justify its valuation in the long run.
