Shares of Intuitive Surgical (ISRG 0.59%) dipped this week in response to a third-quarter report that seemed generally positive.
Revenues for the leading manufacturer of robotic-assisted surgical systems climbed 12% year over year to $1.76 billion. Unfortunately, nervous investors were quick to notice that this figure was about $20 million lower than the company recorded during the previous quarter.
Investors concerned that Intuitive Surgical's growth is stalling out knocked the stock down sharply in after-hours trading Thursday, and it was still down by more than 4% when the market opened on Friday.
Medtronic (MDT 0.62%) and Johnson & Johnson (JNJ -0.46%) have been making waves in the robot-assisted surgery field. Is Intuitive's third-quarter slump a sign that its competitive advantage is eroding?
Competition or seasonality?
Hospital purchasing departments don't spread out their purchasing activity as evenly as medical device manufacturers would like them to. The first and third quarters are typically Intuitive's slowest periods of the year.
ISRG Revenue (Quarterly) data by YCharts.
The minor contraction that Intuitive reported in the third quarter this year wasn't as inspiring as its performances in pre-pandemic years. That said, it probably isn't a sign the company is losing ground to its competitors.
If the company reports quarter-over-quarter stagnation again in the fourth quarter, which is typically its strongest, investors should be concerned. For now, though, the stock's recent dip looks more like an opportunity to buy shares of a terrific business at a relative discount.
A strong advantage
In the third quarter, Intuitive Surgical grew its base of installed da Vinci Surgical Systems to 8,285 -- a 13% gain year over year. Sales of systems are a significant source of revenue for the company, but the majority of its total revenue comes from the sales of the instruments and accessories that those machines use, and that need to be replaced after each procedure. Third-quarter procedure volume grew 19% year over year, so we can be fairly confident that revenue from instrument sales isn't going to evaporate in the near term.
Intuitive pioneered the use of robot-assisted surgery more than 20 years ago, and its da Vinci systems are likely to maintain their position in the U.S. healthcare market for the foreseeable future. Johnson & Johnson's robot-assisted surgery efforts have been mostly limited to knee replacements and lung-related procedures, which generally don't overlap with the types of procedures da Vinci systems are approved to handle.
Intuitive Surgical's da Vinci systems are used to perform heaps of urologic procedures. Medtronic is developing its surgical system -- called Hugo -- to compete in this field, but it's way behind. Medtronic just began enrolling U.S. patients in need of urologic procedures into a clinical trial last December.
Hugo and most of the da Vinci systems it could compete with employ multiple instrument arms. In April, Intuitive received clearance from the Food and Drug Administration to use its new single-port system, called da Vinci SP, for simple prostatectomies. Clearance for this representative procedure expands the list of urologic procedures Intuitive's new single-port system can handle. Meanwhile, Medtronic is still testing its multiport system.
Intuitive Surgical investors still need to keep an eye open for signs that Hugo could differentiate itself from the da Vinci systems that surgeons are already trained to use. Without clear signs of superiority, we can be fairly sure that there won't be many hospitals willing to retrain their surgeons to use Hugo systems while the da Vincis they have already invested in collect dust.
Image source: Getty Images.
A buy on the dip?
Shares of Intuitive Surgical have fallen by around 26% from the high-water mark they set this summer, but they're still not cheap. At recent prices, they are trading for around 46 times forward earnings expectations.
Intuitive Surgical's forward earnings multiple would be appropriate for a company that had been growing its bottom line by double-digit percentages year after year -- but this company hasn't been. Its trailing 12-month earnings have risen by just 26% total over the past five years.
Now definitely isn't the right time to sell any shares of Intuitive Surgical that you may be holding. That said, it would probably be best to wait for a more attractive valuation before buying.
