Is Intuitive Surgical Stock a Buy?

Robotic surgery looks like a futuristic fantasy, but thanks to Intuitive surgery (NASDAQ: ISRG), we have access to it now. As the manufacturer of da Vinci robotic surgery units, Intuitive is a pioneer of high technology in healthcare, and therefore it is an extremely profitable business.

But as savvy investors know, it doesn’t always pay to bet on an innovator. Often times, copycats and followers end up being the best for long-term investors as it tends to require a lot of spending on research and development to stay ahead of the curve. Nonetheless, I think Intuitive Surgical has a lot of benefits ahead – and at the moment, there isn’t much to worry about the competition eating its lunch.

Image source: Getty Images.

The equipment is well established

The most important argument in favor of Intuitive’s actions is that its business model is, in a nutshell, exquisite.

First, she sells her da Vinci robotic surgical systems to hospitals, where she then trains surgeons in their use and helps with installation. Hospitals buy maintenance services to protect their investment, and they are also forced to purchase disposable surgical tool sets as well as accessories for their robot. As Intuitive develops new types of tools and accessories, it sells them to its existing customers while providing additional training as needed.

Importantly, because of the time and money hospitals have to invest in educating their staff on the use of da Vinci systems, there is virtually a built-in customer loyalty program. Even if a competitor offers a slightly better or cheaper robot, it’s so difficult to switch products that customers are more likely to stick with the da Vinci, which their surgeons already know how to use.

Investors will also appreciate Intuitive’s financial performance. Over the past five years, free cash flow (FCF) has increased by almost 40%. This means that the business has become more efficient at reaping additional returns from every dollar invested. It also means that management has a growing pool of resources that it can use to invest in new technology, acquire promising companies, make share buybacks or expand the existing business.

Revenue and profits are also growing steadily, aided by the increasing use of its robotic surgical systems year on year. In short, despite its size, Intuitive continues to gain momentum.

ISRG Revenue Graph (Quarterly)

ISRG income data (quarterly) by YCharts.

Powerful competitors are starting to move

As favorable as its trajectory is, Intuitive Surgical is not a risk-free action. It’s not the only company in robotic surgery anymore, and start-ups aren’t the only ones it has to worry about in the rearview mirror. Stryker, Johnson & johnson, and Medtronic are all trying to establish themselves in this field and are among the largest healthcare companies in the world, so their efforts should be at least somewhat fruitful.

But so far, these competitors are still far behind Intuitive. Johnson & Johnson’s robot recently encountered a problem, possibly delaying its development by up to two years. On the other hand, Stryker’s robot is already on the market, but it specializes in joint replacement surgeries, so it does not directly threaten the da Vinci, which is intended for general surgery, urology and gynecology. And while the Medtronic system can perform many of the same procedures as the da Vinci, it is only now starting to be used on first-time patients in some of its indicated niches.

Is it a good time to buy?

Overall, I don’t see any major obstacles to the continued growth of Intuitive over the next several years. Beyond that, competitors will likely start to make deeper inroads, but there will likely be plenty of room for everyone as long as the robotic surgery market continues to grow.

Now is the time to buy Intuitive shares. As long as the company continues to do what it has been for the past decade, shareholders should see their investments grow for some time into the future.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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