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Intuitive Surgical preview: See momentum continuing

July 20, 2017

Intuitive Srgical (NYSE:ISRG) stock has gained nearly 50% this year, adding close to $12 billion in market cap. The stock jumped nearly 6.5% following its Q1 2017 earnings announcement. While it’s difficult to predict that happening again this quarter, the company’s guidance has proven conservative before. In any event, we are confident that its revenue growth momentum is likely to continue. While unit sales of new da Vinci surgical systems remain an important metric to consider, the growth in the number of procedures performed using these systems holds even greater weight as it better represents adoption by physicians and expected future demand. In the first quarter, the number of procedures performed using da Vinci surgical systems accelerated, prompting the company to raise its full year guidance. We believe that Intuitive Surgical is positioned well competitively to benefit from this increased adoption in the near term, but may face some competitive challenges in the longer run. 

Our price estimate of $791 for Intuitive Surgical is nearly 15% below the market.

https://www.trefis.com/slideshowWidget?ticker=ISRG&rhs=3&width=600

What’s Working Well For Intuitive In The Near Term?

The increase in the number of robotic procedures is being driven largely by urology and gynecology, which are relatively mature categories. However, there has been a notable increase in general surgery procedures conducted by da Vinci surgical systems, and the potential for growth is significant. The company has observed strong surgeon interest and an encouraging utilization rate in general surgery. The upcoming product cycles should help sustain the momentum, especially in 2018. The company plans to invest in a new technology upgrade over the next few quarters, contingent on regulatory approvals. There is also meaningful potential to expand in international markets, which should help the company offset the issues it is facing in China.

Longer Term Competitive Risks

Medtronic has been working on building its own surgical robot and plans to launch it in 2018. Medtronic is expected to start with the Indian market, which likely suggests that the company intends to bring the cost of robotic surgery down given the dynamics of the market. This could have an impact on Intuitive’s value proposition, and could force it to reduce prices over time. Additionally, Medtronic already has a strong presence in minimally invasive surgery, which can allow it to target relevant procedures right from the start. It also has strong relationships with a much larger base of health care providers as compared to what Intuitive has.

Verb Surgical, a joint venture formed between Alphabet and Johnson & Johnson in 2015, is working on integrating big data and machine learning with robotic surgery. It could also be a formidable competitor down the road, considering the two companies’ deep pockets and Google’s technological prowess. There are also other companies, such as TransEntrix and Titan Medical, which are working on creating competing products.

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