Shareholders of Intuitive Surgical, Inc. (NASDAQ:ISRG), maker of the da Vinci Robotic Surgical System, have endured a perplexing couple of months.
First, several members of the medical community began questioning whether the company’s machine was necessarily helping hysterectomy patients. Then yesterday, the company came out with earnings that well exceeded expectations, only to see the stock dive further today.
It’s never good to live and die by expectations; but Intuitive Surgical, Inc. (NASDAQ:ISRG) clearly brought in and made more money last quarter than many were expecting.
The business itself is divided into three divisions. The first, Instruments, is responsible for selling disposable parts that a hospital must buy in order to perform certain surgeries. The second, Systems, is the one actually selling the da Vinci robots to hospitals. The third, much smaller division is Service, which visits hospital sites to make sure the machines continue to function properly.
Here’s how they fared during the first quarter.
Though the company experienced a 30% growth in earnings, after today’s 4% decline, today’s P/E of 29 seems about fair. But Intuitive Surgical, Inc. (NASDAQ:ISRG) has always tended to trade above its growth rate; and the question for investors is: “Why did that trend stop?”
Causes for concern
There are two primary reasons Intuitive’s stock isn’t getting as much love as it once had. For starters, guidance was lower than investors were hoping for in the second quarter. It’s important to remember, however, that guidance is just that — an educated guess. And while it serves as a data point, it’s a very short-term one at that.
The larger concern is likely the press that’s started to question whether the da Vinci is needed for minimally invasive hysterectomies. Some may look to what’s happened in prostatectomies in the past as a blue print.
As CEO Dr. Gary Guthart explained in 2012, there was a change in prostate “screening protocols and a change in treatment recommendations for low-risk cancer patients away from definitive treatment.” These changes contributed to a 15% decline in prostate procedures in the United States.
If protocols were changed for hysterectomies, it isn’t out of the realm of possibility to see a similar decline in hysterectomies.