Robotics is something that is transforming many industries — and one of the biggest winners is the area of healthcare. Using robots in minimally invasive surgeries has been shown to decrease chances of complications, shorten hospital stays, and lower mortality rates. And one player in particular dominates this market, growing its system installation base, procedure volume, and revenue in the double digits in the most recent quarter.
I’m talking about Intuitive Surgical (ISRG 0.70%), a company that sells the world’s leading surgical system: the da Vinci. The stock has delivered both over the long term and in the near term, gaining nearly 200% over five years and advancing about 13% this year so far. And from here, there’s still plenty of room to run.
Let’s take a closer look at Intuitive and discover why it’s the ultimate healthcare robotics stock to buy with $600 right now.
Image source: Getty Images.
What is the da Vinci surgical robot?
As mentioned, Intuitive is the maker of the da Vinci, a robotics system used for many minimally invasive procedures, from hernia repair to hysterectomy and gastric bypass surgeries, just to name a few.
The latest version, the da Vinci 5, has been used for more than 40 different procedure types so far. This model holds 10,000 times the computing power of the company’s da Vinci Xi and offers surgeons greater autonomy and advanced data analytics capabilities. Intuitive recently launched the da Vinci 5 and continues to sell a variety of da Vinci models — including the Xi — to serve the various needs of hospitals and surgeons.
Two things in particular stand out, ensuring Intuitive’s dominance in the market and ongoing revenue growth potential. The first is the company’s solid moat, or competitive advantage. A da Vinci robot represents an investment of more than $1 million for a hospital, meaning these buyers likely will aim to amortize the purchase over time — so won’t easily switch to a rival system.
To further reinforce this, surgeons generally train on da Vinci robots, so they probably favor using these systems instead of learning to use an entirely new platform. This means they’ll back the idea of sticking with the da Vinci.
The second major strength of Intuitive is how it generates revenue. The company actually doesn’t make the lion’s share of its revenue through the sales of da Vinci robots. Instead, it brings in most of its revenue through the sales of accessories and instruments needed for each procedure. This is fantastic because it means that the more hospitals use their robotic systems, the more revenue Intuitive can generate. It also ensures that the company’s revenue growth doesn’t end when a hospital purchases or leases a system — in fact, the revenue growth opportunity is just getting started.
Earnings growth and recurrent revenue
For example, in the recent quarter, Intuitive brought in $654 million from systems placements and more than $1.4 billion from the sales of instruments and accessories. All this has translated into steady earnings growth over time and recurrent revenue. Last year, 84% of the $8.4 billion in revenue was recurring, the company said.
And the latest figures offer us reason to be optimistic about potential sales growth ahead. In the latest quarter, Intuitive placed 493 da Vinci systems — compared with 415 in the year-earlier period — and of those placements, 174 were da Vinci 5 robots.
Now, let’s consider valuation. Intuitive stock, trading for about 70x forward earnings estimates, isn’t cheap. But the company’s market leadership, solid moat, and recurring revenue make it worth the premium. Intuitive has proven its ability to grow earnings over time — and the stock price has followed, delivering gains to investors. So, I wouldn’t let the current valuation stop me from buying this stock.
Instead, I would focus on Intuitive’s performance so far and future prospects, as well as its financial stability — the company finished the recent quarter with more than $8.8 billion in cash. And with these points in mind, Intuitive looks like the ultimate healthcare robotics company to buy now with $600 and hold on to for the long term.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.
