Intuitive Surgical (NASDAQ: ISRG), best known for its flagship da Vinci robot, is the global leader in the robotic surgery market. The da Vinci, available in several versions including the latest da Vinci 5, generates billions of dollars of revenue annually, and this performance has helped the company's stock soar over the near term and the long term. Intuitive shares have climbed nearly 200% over the past five years, and they've advanced about 15% so far this year.
Considering da Vinci models cost more than $1 million, you would expect this robotic surgery giant to generate most of its revenue through the sales of these platforms. But that isn't the case. The company actually makes most of its revenue selling something else, and the great news is that these items offer Intuitive a recurring revenue stream year after year. Let's find out more.
Image source: Getty Images.
Surgeons know the da Vinci well
First, a bit of background on Intuitive and how and why the company is such a leader today. The company benefits from the fact that it's been around for so long, giving it an early-to-market advantage. Intuitive opened its doors in 1995 and launched the first da Vinci system five years later. Since, it's released next-generation versions and just last year began the rollout of the da Vinci 5, a platform with 150 design innovations. This latest da Vinci reduces procedure time, increases surgeon autonomy and efficiency, and has more than 10,000 times the computing power of earlier systems.
Surgeons have trained on the da Vinci for years and know it well. And this longtime presence in the market and relationship with surgeons are part of Intuitive's solid moat, or competitive advantage. Surgeons are unlikely to opt for a new platform since they're very familiar with and comfortable using the da Vinci.
This has translated into strong earnings growth over time for Intuitive, with declines primarily during times such as early pandemic days -- when many surgeries were postponed or canceled. Intuitive's return on invested capital shows it's made wise investments, scoring a win over the years.
ISRG Revenue (Annual) data by YCharts
Now, let's talk about how Intuitive makes money. Of course, the selling and leasing of surgical systems brings in a significant amount of revenue annually. For example, last year, systems generated $1.9 billion in revenue for the company. But something else contributed more than $5 billion to revenue, and that is the sales of instruments and accessories used during robotic procedures.
Recurrent revenue for Intuitive
The idea is that a hospital invests in a da Vinci platform, but each time surgeons use that system they also need to use instruments and accessories -- some of which are disposable so must be replaced with each procedure. This translates into a recurrent revenue opportunity for Intuitive each time it sells or leases out a da Vinci system.
NASDAQ: ISRG
Key Data Points
And, to add to that recurrent revenue, Intuitive also sells service contracts for maintaining its robotic platforms. Last year, this brought in $1.3 billion in revenue. So, of the total $8.3 billion in revenue for the year, 76% of that came from instruments, accessories, and services. And these all are repetitive, meaning Intuitive's revenue just gets started when a hospital signs on the dotted line to buy a surgical robot.
What does all of this mean for you as an investor? This, along with the moat I mentioned above, makes Intuitive an investment you can count on -- the company offers the stability of an industry leader along with growth potential thanks to this recurrent revenue. Some may consider the stock, trading at 74x forward earnings estimates, expensive right now -- and it is pricier than it was a year ago when it traded below 60x. But I think it's worth the premium considering these points, especially for investors aiming to buy and hold, as this top robotics stock still has room to run over the long term.
