Intuitive Surgical (ISRG +1.85%) and Vertex Pharmaceuticals (VRTX +1.27%) have posted excellent returns over the past 10 years, but they are encountering obstacles right now. Both healthcare giants have significantly underperformed the market this year. However, this may be a great opportunity to pick up their shares on the dip, provided there are good reasons to think they can bounce back. So, for investors with $1,000 to spare (make sure it isn't being saved for emergencies), is either one of these stocks worth buying right now?
Image source: The Motley Fool.
1. Intuitive Surgical
Let's go through some of the reasons why Intuitive Surgical has lagged broader equities of late. First, steep tariffs have affected the medical device specialist's financial results. Things have been manageable for Intuitive Surgical on that front so far, but if nothing changes -- or worse, tariffs increase -- their effect on the company's earnings could compound over time. Second, Intuitive Surgical is facing increased competition in the robotic-assisted surgery (RAS) market.
Last year, Medtronic earned clearance for a device called the Hugo system for urologic procedures, where Intuitive Surgical competes with its da Vinci system. Medtronic will seek other indications, and other healthcare giants, including Johnson & Johnson, are also looking to enter this market.
NASDAQ: ISRG
Key Data Points
Third, Intuitive Surgical's shares aren't cheap, to say the least. The company is trading at 44.3x forward earnings, compared to the 16.5x average for healthcare stocks. Intuitive Surgical arguably deserves a premium, but some investors feel the stock is currently priced for perfection, especially given the headwinds it has faced. With all that said, what should investors do?
Note that Intuitive Surgical has continued to post strong financial results. In the first quarter, the company's revenue and earnings grew at a good clip, gross margins expanded, and its installed base got bigger, largely thanks to the fifth generation (the latest) of its da Vinci system. Meanwhile, Intuitive Surgical has a vast addressable market in the underpenetrated RAS niche and a wide moat from switching costs.
This is why the company can perform well despite increased competition and even fend off the threat of tariffs, perhaps through price raises. Intuitive Surgical's valuation is indeed an issue, but my view is that for investors looking to hold the company's shares for a long time -- say, a decade or more -- the stock remains attractive. At about $460 apiece, investors can get two shares with $1,000.
2. Vertex Pharmaceuticals
Vertex Pharmaceuticals' shares are down 14% over the past year. The company's core therapeutic area -- it markets the only drugs that treat the underlying causes of cystic fibrosis (CF) -- is performing pretty well, but it is now a mature business that is no longer the growth driver it once was. Meanwhile, Vertex Pharmaceuticals has faced setbacks in its efforts to diversify its portfolio of approved medicines, and the ones it has launched have generated little revenue. That's why the stock has underperformed lately.
However, the company's prospects for the next decade remain highly attractive. The CF business should continue generating dependable revenue until at least the mid-2030s, before Vertex's most important medicines lose patent exclusivity, since CF patients need to continue taking drugs indefinitely.
NASDAQ: VRTX
Key Data Points
The biotech leader is also expanding into new regions to increase its addressable market, and it could launch newer, better medicines that will jump-start sales growth. Vertex Pharmaceuticals is developing therapies to target those CF patients who aren't eligible for its current ones. Further, the company's efforts to diversify should eventually pay off. Earlier this year, Vertex Pharmaceuticals posted strong phase 3 results for povetacicept, an investigational medicine for IgA nephropathy (a kidney disease).
Povetacicept seems destined for approval and could become an important growth driver as Vertex Pharmaceuticals earns several indications for it. The company's late-stage pipeline features other promising candidates, such as inaxaplin for APOL-1 mediated kidney disease, that could earn approval within the next three years or so. Even Vertex's current non-CF products, including Journavx for acute pain, should eventually contribute meaningfully to revenue growth. For all those reasons, Vertex Pharmaceuticals is a great stock to buy on the dip. Shares are changing hands for about $425 each, so with $1,000, you can get a pair.
