The product
There is no doubt that Intuitive Surgical, Inc. (NASDAQ:ISRG) makes very futuristic surgical gear in the Da Vinci robot. The advantages of the robot are compelling. The Da Vinci robot allows the surgeon to enter the body less invasively, see anatomy more clearly, and interact with tissue more precisely. The surgical platform costs anywhere from $1 million to $2 million with instruments and accessories costing between $1300 and $2200 per procedure.
Intuitive Surgical, Inc. (NASDAQ:ISRG) has sold about 2700 Da Vinci robots around the world, with about 2000 in the US. They collectively do almost half a million surgical operations per year in disparate fields such as urology, gynecology, cardiac, thoracic, and head and neck. The company itself estimates that the total target procedure market numbers 1.3 million in the US and another 1.3 million in international markets.
This type of demand and premium pricing has spurred huge growth and great margins. Intuitive Surgical, Inc. (NASDAQ:ISRG) has grown earnings an average of 34% per year over the past five years, and maintained healthy gross margins of over 70% and profit margins of 30%.
But all of this changed when the company warned, on July 9, that it saw headwinds. The company warned that the growth would slow, sending shares down 15% to an 18-month low. Then when second quarter results came out, the company’s stock fell another 7%.
The second quarter results showed slowing growth and margin pressure. The company sold 143 da Vinci robots versus 150 last year, and revenue only climbed 7.8%. Gross margin dropped to 70% from 72%. Profit was $159.1 million, or $3.90 per share, versus $154.9 million, or $3.75 per share, a year earlier. Analysts were expecting $4.04 a share.
In the quarterly presentation, management said
The decline in U.S. system sales was impacted by several factors, including, among other things, increased economic pressure on hospitals, which in turn caused some to defer da Vinci System purchases, and moderating growth in our benign gynecologic procedures…
Analysts are not as excited about the opportunity as before. Northland Capital has a price target of $370 while Cantor Fitzgerald has a price target of $425.
Versus peers
While Intuitive Surgical, Inc. (NASDAQ:ISRG) has no direct competitors, these two companies are also trying to capture the robotic trend.
MAKO Surgical Corp. (NASDAQ:MAKO) is a medical device company that markets its advanced robotic arm solution, RIO system, for the knee and hip. Like da Vinci, the RIO system is less invasive and more accurate than traditional surgical procedures.
Similar to Intuitive Surgical, Inc. (NASDAQ:ISRG), MAKO Surgical Corp. (NASDAQ:MAKO) is expected to face headwinds as hospitals are hesitant to increase capital expenditures. The Obamacare tax increase on medical device sales could further damage the company’s top line. Unlike Intuitive Surgical however, Mako Surgical is currently unprofitable and analysts do not expect any profit next year. Mako shares are down 3% year to date and have an average analyst price target of $15.56.
iRobot Corporation (NASDAQ:IRBT) makes consumer household robots such as the Roomba and the Scooba. The household robots segment account for nearly 90% of iRobot’s revenues and is growing at a 25% annual clip. With revenues around $500 million per year and the total addressable market for iRobot’s products around $14 billion, iRobot has a lot of room to grow.
Analysts are expecting the company to grow earnings by 9.1% annually over the next five years, but they have largely written off the launch of iRobot Corporation (NASDAQ:IRBT)’s next product, the Ava 500, a telepresence robot designed for the enterprise market. According to iRobot, the telepresence market could be another $14 billion dollar opportunity and any traction made in that market could send growth soaring. Shares of iRobot have rallied 84% year to date and could rally further.
Conclusion
Intuitive Surgical, Inc. (NASDAQ:ISRG) shares are trading at 22 times this year’s earnings and 19 times next year’s earnings. It has no debt, and $75 cash per share on hand. The stock is trading at a low P/E. But there are storm clouds on the horizon. As second quarter results showed, the demand for da Vinci systems may not be as robust as it was in the past. Expecting growth to re-accelerate is no sure thing, and investors may have to wait a long time for fundamentals to catch up with the price. It is better to stay on the sidelines.
The article Intuitive Surgical: Is Growth Over? originally appeared on Fool.com and is written by Jason Bond.
Jason Bond has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, iRobot , and MAKO Surgical. The Motley Fool owns shares of Intuitive Surgical. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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