What’s Missed on Intuitive Surgical, Inc. (ISRG)’s Big Miss

Investors got little warning on Intuitive Surgical, Inc. (NASDAQ:ISRG)‘s big second quarter miss. The first most heard about it might have been the company’s own press release – the company doesn’t officially report until next week.

In practical terms the miss isn’t much – revenue of $575 million against an expected $630 million, and net income of $160 million instead of $177.7 million. But the stock, which was previously priced to perfection, fell out of bed anyway, dropping over 17% and shedding $2.87 billion in market cap overnight.

What’s going on?

Sean Williams blames Obamacare, saying uncertainty over future payments is causing hospitals to stop buying. Dan Carroll suspects a series of FDA questions about the safety and efficacy of Intuitive’s DaVinci system may be to blame, while Karl Thiel wants you to see an exclusive report on the matter.

Before all this, Intuitive Surgical, Inc. (NASDAQ:ISRG) was a big favorite here. Brian Stoffel had it on his ideal portfolio. The Fool was recommending it explicitly, and even its purchases were moving markets.

The nature of a tech market

Having covered the medical device market since 2006, here is my take.

First, DaVinci robots are a miracle. They increase a surgeon’s productivity, and they reduce mistakes when compared with doing operations by hand. Over time, they increase a surgery center’s profitability and reduce its liability.

But this is a technology market. Just because you’ve got something that’s cool doesn’t mean you’ll always be able to sell it at whatever price you set. Eventually the market moves through its demand curve, which means prices and margins must go down. As Jim Cramer noted last month, the price of Intuitive shares were overextended, on a technical basis.

Also, just because Intuitive Surgical has lots of patent protection on how DaVinci works, this doesn’t mean no one else can make a robotic surgeon. As Keith Speights wrote on July 2, there is now competition in this market.

The competition is minor

Fortunately for Intuitive, and its shareholders while there are other companies in this market, they’re generally small, specialized, and far more troubled than Intuitive is.

MAKO Surgical Corp. (NASDAQ:MAKO) has a robot that focuses on orthopedic procedures, which was used over 10,000 times last year. The company is not yet profitable, although sales are up 20% year-over-year, but it’s debt-free, it had a great fourth quarter of 2012, which generated cash, and its RIO system could, over time, become directly competitive with Intuitive in other areas of surgery.