Why Intuitive Surgical Inc. Shares Were Sliced

Intuitive Surgical shares take it on the chin following the company's first-quarter preliminary revenue guidance. Find out why this could actually be an intriguing buying opportunity.

Sean Williams
Sean Williams
Apr 9, 2014 at 12:43PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Intuitive Surgical (NASDAQ:ISRG), a developer of robotic surgical soft tissue device systems under the da Vinci brand-name, dropped as much as 10% after the company issued its preliminary first-quarter guidance after the bell last night.

So what: According to its press release, Intuitive Surgical anticipates revenue for the first quarter will be approximately $465 million, down 24% from the $611 million reported in the year-ago period. By comparison, Wall Street had been expecting nearly $537 million in revenue. The specific culprit appears to be da Vinci systems revenue, which is expected to decrease by approximately 59%, to $106 million from $256 million in the first quarter of 2013. Intuitive blamed this steep drop on lower demand in the U.S. for its machines, as well as $26 million in deferred revenue, which won't be accounted for this quarter. The company also announced a pre-tax earnings charge of $67 million against its first-quarter earnings, reflecting what it believes to be the estimated cost to settle a number of legal claims against the company.

Now what: Yet again, Intuitive Surgical's earnings report won't even be in the ballpark with Wall Street's expectations, which has to be getting a little frustrating from the perspective of shareholders of this previously fast-growing robotics company. While I do believe that the overhang from the ongoing investigation into the safety and efficacy of its da Vinci surgical system by the Food and Drug Administration had something to do with the drop in demand, I suspect Obamacare played a key role, as well. I believe that the uncertainty surrounding sign-ups (i.e., would the 7 million enrollment number be met?) led many hospitals to holster their disposable cash when it came to larger-ticket items like the da Vinci surgical system, which costs close to $1.8 million. However, with Obamacare's enrollment figures meeting the administration's original expectations, I also believe Intuitive has the tools needed to surprise in the second quarter to the upside – especially with its newly updated Xi surgical system ready to launch. Keep your eye on Intuitive Surgical.