Intuitive Surgical (ISRG) $449 – Good company, I would Hold for a better price.
The company’s primary product offering is the Da Vinci Surgical System, which enables complex surgery using a minimally invasive approach.
Positives:
Recurring, and sustainable revenues – The majority of Intuitive Surgical’s revenue comes from instruments and accessories delivered to existing customers. These items are frequently replaced and provide a recurring revenue stream. Customers tend to be also “lifetime” customers of its instruments, accessories, and services, which includes maintenance, service contracts, and training provided to hospitals and surgical centers. This generates a flywheel effect.
There is a long-term trend favoring minimally invasive surgeries, technological/AI advancements, and improved patient outcomes.
The new Da Vinci 5, their flagship product could jump start another major product upgrade/replacement cycle.
Market leadership, innovation, great cash flow and operating margins of over over 25%, because for the past 10 years there was little competition.
Negatives
Competition has picked up with Medtronic’s Hugo Surgical System and Johnson & Johnson’s Verb Surgical. Verb develops similar invasive surgical robots such as the Da Vinci robots. Verb developed the robot in collaboration with Verily, which is backed by Alphabet with its enormous capital. Right now their surgical robots are currently still in development, but once approved, Intuitive Surgical could face significant headwinds.
Valuation – ISRG deserves a premium for market leadership, innovation, great cash generation and sustainable revenues but the big risk is the stretched valuation. We’re paying 19x sales for 16% growth, and ISRG’s past 10 year growth has been only 14%, even as a quasi monopoly in their field. The biggest gain has come since Nov 2023 when the stock was at $250, that’s an 80% run up. Getting in at this price means forward returns could be muted – it would make sense to wait for a decline.