Dueling Fools: Intuitive Surgical Bear

I'll be honest. When I take the bear side of a duel I've usually got a full load of negative ammunition that I've got ready to let fly. I found it very difficult to find anything bad to say about Intuitive Surgical (NASDAQ:ISRG). For good reason. The company has been on fire, with its stellar Q2 earnings report triggering a 40% jump in the price of the stock over the last week.

Intuitive Surgical has dominant robotic surgery products, is the first mover in an emerging and important field, has a torrid growth rate, and is the best-performing recommendation in the nearly three-year history of Rule Breakers, where it was initially recommended by David Gardner at $44 early in 2005.

What's a bear to do?
I'll tell you this: Intuitive's not a stock to buy right now. It pains me a bit to say that about a company I like so much. I don't believe, even with great companies, that you should buy shares at just any price at any time. After the recent jump in price, I don't think this is a good time to get on the Intuitive Surgical bandwagon. This is an incredibly volatile stock, and you'll have better opportunities in the future.

It's all in the numbers
The market often overpays for growth, projecting today's halcyon days much too far into the future. With Intuitive's stock rocketing in the past week alone, I'd be very worried if I were a shareholder.

Before you read on, how much growth do you think is already priced into this stock?

As of July 23, 2007. All figures in millions.

Here's the lowdown. Using a 12% discount rate, the company must grow its FCF by 30% a year for the next five years -- and then 15% a year for the next 15 years -- to justify today's price.

That's just to justify a share price of over $200. That's not factoring in the performance needed to actually make you money if you were to buy shares today. That's the goal of investing, right?

If you think you'll make money buying shares of Intuitive right now, you believe the company's performance will exceed the growth rates I just gave you. Maybe it will, maybe it won't. I don't know about you, but this is a pretty high hurdle to ask a company to clear. Some may call that being priced for perfection. I would.

Growth opportunities
The company has done a great job in driving usage in its initial prostatectomy market. There are no signs of slowing down, with the daVinci prostatectomy segment expected to turn in growth over 65% this year. That's not even the fastest-growing product. The new da Vinci hysterectomy offering is expected to grow by 175%, though that's on a smaller base of sales.

That's pretty good, but how long can it last?

If you're betting on Intuitive Surgical, you'd better hope it lasts for some time to come. 50% annual FCF growth for the next five years is what it's gonna take for you to double your money owning this stock.

Things look great now, I agree. But this is a song I've seen played several times before, and sometimes it doesn't end pretty. This is a company priced where a very good quarter of 30% growth would be "below market expectations," causing the stock to get a haircut.

Over the past two years, this stock has taken several dips of 20% or more. If you really want to buy shares, my advice is to wait for a pullback. It almost certainly will come. Buy companies like this when there are chinks in the armor, not when everyone expects perfection.

In sum? Great company. Wrong time.

Intuitive Surgical is a Motley Fool Rule Breakers pick.

You're not done yet! Read the other arguments and vote for a winner.

Fool biotech analyst and health-care sector head Charly Travers does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.