Up by some 279% in the past 10 years, Intuitive Surgical (ISRG -0.41%) is a popular growth stock for a reason. With its super-cool robotic surgical systems -- named after Leonardo da Vinci and operated by specially trained surgeons -- Intuitive Surgical is creating and distributing the future of minimally invasive care one sale at a time.
But being the first mover in a brand-new space like robotic surgery entails a few risks, and even industry leaders can sometimes fall into stagnation and decline. Is Intuitive Surgical still an all-star option for growth, or is buying as many shares a bad idea right now?
Why its future isn't as certain as before
Investors have been able to count on Intuitive Surgical's growth engine for quite some time. The company's da Vinci robotic surgical suites have been on the market for more than 21 years, and between sales of the robots themselves, maintenance contracts, replacement parts, accessories like new surgical tools, and consumables, it brought in more than $1.3 billion in trailing-12-month net income, up from a mere $660 million in 2017.
Via steady investment in research and development (R&D), the company continuously churns out new products in the form of robotic toolhead attachments, imaging systems, and software packages for use with its robots.Demand for procedures performed with the da Vinci is expected to continue growing by between 12% and 16% in 2023, which is roughly in line with growth in each of the past four years.
But after the company missed Wall Street's Q4 earnings per share (EPS) estimate by $0.02 on Jan. 24, shareholders fear its growth might be slowing.The fact that it placed 4% fewer da Vinci units in the fourth quarter compared to the year prior is troubling as it could portend a more sustained deceleration of installations, which would in turn mean less recurring revenue from sales of consumables down the line.
Plus, the total return of its stock has slightly underperformed the market over the last three years, rising by only 24.1% compared to the market's gain of 27.8%.
Management points to a few headwinds that have been mucking up the works in that period, some of which are surprisingly sticky. Inflation and enduring supply chain disruptions resulting from the pandemic are continuing to chip away at its profit margin, which is surprising because the supply chain issues have been going on for more than a year at this point.
In China, the pandemic remains in full swing, slowing demand for surgical procedures. Elsewhere, hospitals are experiencing a staffing crunch that reduces their ability to provide robotic surgeries, which cuts down on the demand for both maintenance services and disposable parts, not to mention likely curbs purchases of new systems and accessories.
At the same time, Intuitive Surgical's international operations leave it vulnerable to the negative impacts of foreign exchange on its top line. It's clear that eventually these problems will ease, but it could take longer than investors would prefer.
The competition is drawing nearer
There is little reason to suspect that Intuitive Surgical will be in any enduring trouble that might detract from its viability as an investment, at least not for now. While it's true that numerous competitors are making their way into the robotic surgery space, including powerful players like Johnson & Johnson and Medtronic, the company's top-line growth has so far continued to plod forward, with an estimated compound annual growth rate (CAGR) of 12% from 2019 to 2022.
Plus, once Intuitive Surgical's robots are installed in an operating room, they'll continue to yield revenue for years because of how inconvenient it would be to switch to another system made by a competitor. So as long as it can keep placing units at the same rate, future growth is somewhat protected from erosion.
Nonetheless, on a long enough timescale, competitors will start to erode Intuitive Surgical's market share if its products don't have some clear advantage. That means if you've been buying its stock hand over fist for the last few years, it might be time to think about slowing down a bit and diversifying your portfolio. It'll likely continue to be a decent investment moving forward, but risks are slowly increasing, and the near-term outlook isn't necessarily great, either, as indicated by its Q4 update.
