The Ascent Of Intuitive Surgical – Part 1

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Intuitive Surgical (NASDAQ: ISRG) stock reached its all-time high of $718 (closing price: September 22, 2016). Over the last year it has generated return in excess of 50%. Economic moat, lack of competition and financial out-performance are some of the reasons for this excellent run. This is first in a series of articles where we discuss why Intuitive has been both a good company and a good stock, and what’s in store next.

Our price estimate of Intuitive Surgical is $687

 

Intuitive’s Strong Competitive Advantage Produces Economic Moat

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Intuitive surgical designs, manufactures and markets da Vinci System of surgical robots and instruments & accessories. It generates gross margin close to 70%, with EBITDA margin exceeding 40%. Intuitive operates as a virtual monopoly. Its da Vinci Systems, on an average, cost about $1.54 million each. The revenue from accessories and services are recurring in nature and make up for about 70% of the total revenue.

The installed base of da Vinci Systems is around 3,800 currently. Being a pioneer in the field gives Intuitive two advantages – Switching Cost and Network Effect.

i) Switching Cost: The surgical robots are capital intensive and have long life. There is also familiarity and training associated with the usage of robots for surgery. This makes switching cost for hospitals and clinics very high.

ii) Network Effect: The higher number of systems reinforces the users’ confidence leading to further product adoption. Additionally, as an increasing number of systems get installed, the company will get the benefit of learning curve effect. It will be able to improve and innovate its products and services further.

Lack Of Competition 

So far Intuitive has enjoyed free run. TransEnterix was expected to be the challenger with its SurgiBot Systems. The price of these systems would have been nearly one-third that of da Vinci Systems. But the company failed to secure FDA approval.  Other players such Mazor Robotics (Read: What Should Investors Make Of Medtronic’s Investment In Mazor Robotics? ), Smith & Nephew, Stryker etc. are either small or focused on very niche areas of surgery. We will discuss more about the upcoming challenges in the next part of this series.

The Company Has Out-Performed Street’s Expectations

The company has out-performed analysts’ expectations over the last two quarters, in terms of both revenue and EPS. Furthermore, the number of systems sold was also higher than the company’s own forecasts. Company management increased its forecast of procedure growth for the year at the end of both quarters as well. It now stands at 14%-15%, up from 9%-12% at the beginning of the year.

Further, safety reports and the cost-advantage that robotic surgery has over laparoscopic surgery acted as strong tailwinds and boosted investor confidence. So far, the company has come up with three reports this year showing why robot-assisted procedures are better.

Intuitive has performed exceptionally well, except for a few periods of hiccups. But how would the future pan-out? How does Intuitive fare on various business and financial risk parameters? We would discuss these and other such questions in the next parts of this series.

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Also Read: Intuitive Surgical’s Potential Future Growth Strategy

Please refer to our complete analysis for Intutitive Surgical for detailed analysis.

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