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Why Intuitive Surgical market cap exploded in May

June 7, 2017

Shares of Intuitive Surgical (NASDAQ:ISRG), a developer and manufacturer of robotic-assisted surgical systems for soft-tissue surgeries, rocketed higher by nearly $79 per share last month, adding $2.9 billion in market cap, according to data from S&P Global Market Intelligence. There appear to be two key reasons Intuitive Surgical’s share price marched above the $900-per-share mark.

The big catalyst came in mid-May, when investment firm Goldman Sachs initiated coverage on Intuitive Surgical with a “buy” rating and a psychologically delectable price target of $1,000 per share. At the time of the rating initiation, that represented an 18% upside. Said Goldman Sachs analyst Isaac Ro, via CNBC: “With less than 4% of the U.S. surgeries employing robotics today, we think investors should own this structural winner as the market doubles in the next few years. We think emerging markets are underappreciated and near-term concerns on competition are overblown, given ISRG’s proven outcomes/ease.”

Ro pointed specifically at China regarding this last point, suggesting that penetration there is minimal, yet its hospital market is about the same size as that of the United States.

The lesser of the two catalysts came on the second to last day of the month, when the company issued a press release announcing that the Food and Drug Administration had given clearance for the next generation of da Vinci surgical systems to hit the market. The newer system, as announced in the press release, comes with a lower initial price point, which may make it more attractive in emerging and overseas markets, as well as hospitals that are just dipping their toes into the water with regard to robotic-assisted surgeries.

Investors in Intuitive Surgical can take some pleasure in Goldman’s psychologically impressive price target, but they also need to remember that analyst ratings and price targets are rarely long-term drivers for a stock.

What’s far more important to focus on is Intuitive Surgical’s seemingly insurmountable lead in robotic-assisted surgical procedures. Considering Intuitive Surgical has been installing its da Vinci systems for 17 years, it has quite the advantage over its competition in building rapport and training hospitals.

The da Vinci surgical system.

IMAGE SOURCE: INTUITIVE SURGICAL.

Even more impressive, the company is one gigantic razor-and-blades model that leads to improved margin over time, even as the margin on its da Vinci system sales falls. You see, the company relies on the sale of instruments for each procedure and the servicing of its machines to drive high-margin growth. As its installed base grows, this high-margin revenue grows. In fact, it wouldn’t be surprising to see Intuitive attempt to undercut its competitors on machine price to maintain its dominance, because it understands the importance of “selling its blades” (i.e., services) after the initial machine installation.

Ro also brings up a key point: There’s a lot of overseas opportunity, as well as general surgery potential within the U.S.

With a steady sales and EPS growth rate that could top 10% annually through 2020, and a clear competitive advantage, Intuitive Surgical still looks good over the long run.

http://bit.ly/2r4wAm2

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