Over the past three years, medical device maker Intuitive Surgical (ISRG 0.59%) has seen its operations experience severe disruption due to pandemic-related factors. The volume of elective surgeries declined during the early days of the outbreak and subsequent increases in cases of COVID-19 in various parts of the world, leading to lower sales of the instruments and accessories it offers with its crown jewel, the da Vinci surgical system.
But this headwind was never going to damage Intuitive Surgical's business permanently. And in the company's first-quarter update, it showed real signs of bouncing back. Let's discuss why investors should initiate a position in this top growth stock before the next sustained bull run.
Procedure volume is recovering
The da Vinci system allows physicians to perform a range of elective surgeries. But during the pandemic, many of these procedures were postponed as healthcare facilities had their hands full with COVID-19 patients. Thankfully, things are gradually getting back to normal for Intuitive Surgical. In the first quarter, the company's da Vinci procedure volume soared by 26% year over year.
The healthcare giant still experienced some disruption in China, where some coronavirus-related restrictions remained in effect in the first quarter. But overall, Intuitive Surgical is dealing with fewer problems of this type worldwide than in the comparable period of the previous fiscal year. It's important to highlight that elective surgeries aren't really optional.
They are sometimes lifesaving procedures that can be scheduled in advance within a time frame in which the patient is unlikely to suffer significant harm. An example of a non-elective surgery would be a patient whose life is immediately at risk following a car accident. Meanwhile, some mastectomies to treat breast cancer fall squarely in the realm of elective surgeries.
The pandemic created a backlog of such procedures waiting to happen, so it's not surprising to see them bouncing back now. Intuitive Surgical reports that between Q1 2019 and Q1 2023, procedure volume expanded at a compound annual growth rate of about 18%. Its Q1 revenue increased by 14% year over year to $1.7 billion.
The company's adjusted earnings per share of $1.23 rose by 8.8% compared to the year-ago period. There were other positive signs in Intuitive Surgical's update. For instance, it grew its installed base of da Vinci systems by 12% year over year to 7,779. The bigger Intuitive Surgical's base installed is, the more money it makes from the sale of instruments and accessories, leading to higher revenue overall for the company.
It's best to focus on the long term
No one can predict when the next sustained bull market will come. But the coronavirus-related headwinds Intuitive Surgical faced have largely subsided, and the economy, while still not fully recovered, has improved somewhat. For instance, the red-hot inflation we experienced last year has slowed. Even the supply chain issues that disrupted Intuitive Surgical's ability to place its da Vinci systems have improved.
So Intuitive Surgical should be in a good position to ride the next bull market, provided things don't get significantly worse again, considering the company's long-term prospects. The da Vinci system helps physicians perform minimally invasive surgeries, which often lead to better health outcomes since they do less damage to patients' bodies (less cutting of the skin). But these types of procedures still account for a small percentage of total surgeries -- just 3% as of 2021.
Intuitive Surgical is the leader in robotic-assisted surgery and has already built a solid competitive advantage. Its inventions benefit from patent protection, and the company's expensive da Vinci systems mean Intuitive Surgical is likely to keep most of its customers due to high switching costs. The result will be a much larger installed base, as well as higher procedure volume, revenue, and earnings over the long run.
That's why Intuitive Surgical can deliver solid returns for patient investors -- just as it has in the past.
