Of Intuition and Intuitive Surgical

Sometimes, you have to rely on basic intuition with your investment decisions.

It's folly to try to make highfalutin market estimates for what surgical robotics could be, but intuition tells you that it could be very large indeed. That can get stickier when it comes to valuation and stock price potential, though, and that's where I still have problems with Rule Breaking surgical robotic specialist Intuitive Surgical (NASDAQ:ISRG).

Lots of people are waiting on this one to stumble, but they're going to have to wait a little longer. Revenue was up 86% this quarter as system revenue virtually doubled, instrument revenue rose 81%, and service revenue rose 57%. And though the inclusion of a rather large amount of stock option expense muddies the profit comparisons, adjusted margins grew quite significantly.

And intuition tells me there is plenty more to come. There's ample opportunity to use the daVinci platform in gynecological surgical procedures, as well as cardiac surgery and general surgery. And who's to say that the company won't continue to develop new tools, software, and capabilities to extend the reach of its robots even further into the surgical suite?

Intuition also tells me that we haven't even begun to see what this could mean in terms of patient choice and care and/or hospital competition. What I mean is this -- it took a while for the public and popular media to pick up on the impact and benefit of technologies like stents and implantable cardioverter defibrillators. And so it wouldn't surprise me if at all if we start to see more and more people educating themselves on the benefits of robot-assisted surgery and directing their business toward hospitals that make that option available to them.

Valuation, though, is still my biggest problem. Maybe Intuitive Surgical really is the next Medtronic (NYSE:MDT) or Stryker (NYSE:SYK), but how do you value that? I absolutely agree that incredible growth and virtually no competition, at least in terms of rival robots, is worth a premium, but I still don't think it's worth this much of a premium. Still, intuition tells me we haven't seen the highs.

For more medical missives:

• Phase 2 for Intuitive Surgical
• St. Jude's Racing Heartbeat Slows
• Stryker Strikes a Chord

Intuitive Surgical is a Motley Fool Rule Breakers recommendation. For coverage of more companies on the cutting edge, try out David Gardner's Rule Breakers service free for 30 days.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).