Intuitive Surgical (NASDAQ:ISRG) never looks cheap. Then again, growth stocks usually don't. This isn't your daddy's value stock.

The purveyor of robotic systems that assist doctors in performing surgery has had a roller coaster of a year. At a P/E near 60, there's a lot of growth priced into the stock, but it looks like its regaining its legs -- and I think it'll do fine in 2010.

Not for the faint at heart
While Intuitive Surgical is up 261% off its low for the year, that's partially deceiving because the company has a fairly high beta. High-beta stocks tend to rise higher in the good times, but they also fall farther when the bear roars its ugly head.



(Fall) From
2007 Highs

Increase From
2009 Low

Sirius XM Radio (NASDAQ:SIRI)




Las Vegas Sands (NYSE:LVS)




Ford (NYSE:F)




Advanced Micro Devices (NYSE:AMD)




American Express (NYSE:AXP)




Intuitive Surgical




Citigroup (NYSE:C)




S&P 500




Source: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's. As of Dec. 28.

Most of those stocks are still well off their 2007 highs -- remember a 50% increase doesn't cancel out a 50% drop. Of the stocks listed above, only Ford has completely recovered to 2007 levels. But Intuitive Surgical is within striking distance of its all-time high as investors have some confidence that the company can get back to the crazy revenue growth that topped 60% annually in years past.

You can't have one without the other (for very long)
Intuitive Surgical has three main forms of revenue. It sells da Vinci systems used to perform surgeries and service contracts to repair the installed systems. It also sells disposable instruments used by the system. In other words, it's a variation of the standard "razor and blade" model made famous by Gillette.

The difference is that Intuitive Surgical isn't giving away the razor. In fact, at a cost of more than $1 million each, the company saw a substantial slip in the number of da Vinci systems sold in 2009, as hospitals didn't have the capital to buy them.

Surgical procedures, on the other hand, galloped along at their usual stellar rate.


Q1 2009

Q2 2009

Q3 2009

(Decrease) in system sales (YOY)




Increase in procedures (YOY)




Source: Company press releases. YOY = Year over year.

The only way to account for the discrepancy in growth rates is that hospitals are increasing their usage of the system(s) that they own. Instead of doing one procedure per day, for instance, perhaps they've upped it to two. That can only last for so long; there's only so many hours available in a day.

Besides, once different departments start fighting for time on the system, hospital management is bound to pony up for a new machine to keep the cash-cow surgeons happy. In fact, the procedure growth may already be forcing hospitals to increase the number of da Vinci machines they own. In the third quarter, about 25% of new installations went to repeat customers, including a sixth system to Methodist Medical Center in Houston.

Earning its keep
Intuitive Surgical isn't a slam dunk. The company needs to increase revenue growth back near the 60% level it's seen previously in order to justify its current valuation. Unlike a value play where investors just need the pessimism to go away to profit, Intuitive Surgical actually has to deliver.

Investors should keep an eye on the procedure growth. As long as Intuitive Surgical can keep it up, revenue growth is bond to rebound. Eventually.

Think Intuitive Surgical has what it takes to slice and dice its way to the top in 2010? Vote in our poll and then check back when the finalists square off.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. American Express is a Motley Fool Inside Value recommendation. The Fool's disclosure policy is scared of machines with sharp instruments -- especially the office paper shredder.