Shares of surgery and healthcare technologist Intuitive Surgical have been on a tear. The stock is up nearly 20% so far in 2021 and up some 80% in the last two years -- yes, even after considering yet another bout of volatility in recent weeks.
With such a big increase in such a short time, you might think, “Is it too late to buy?”
I remember thinking the same thing as a far younger investor in the late 2000s when I first became aware of this robotic surgery pioneer. And yet here we are, another decade later and Intuitive Surgical continues to be at the front of the attack in leading healthcare technology.
Third quarter 2021 revenue was $1.4 billion, a 30% increase from last year. Granted, this increase reflects the rebound from 2020 when pandemic restrictions affected elective surgeries. Comparing the revenue back to Q3 2019, the average compound annual revenue growth was “only” 12%.
Additionally, Intuitive Surgical is reaching greater scale and producing efficient profitability. Basically, any new revenue it brings in equates to an even higher percentage increase in profit. While sales growth has averaged only low double-digit percentages since 2019, free cash flow is up 70% since the start of 2019. This is extremely significant and if it continues, will be a major contributor to more increases in the stock price in coming years.
Two factors to consider
Intuitive Surgical is seeing a higher rate of its da Vinci robots being leased by customers (hospitals, surgery centers, etc.). In fact, 41% of DaVinci robot placements in Q3 2021 were done on leasing terms compared to just 35% last year. This results in a lower revenue up front compared to an outright purchase, but more consistent revenue over time.
At the end of Q3, total da Vinci systems installed in hospitals and surgery centers were up 11% year-over-year to 6,525 worldwide. Each robot costs millions of dollars, but this is still a small number of da Vinci systems when considering the massive size of the global healthcare system.
More to come in the years ahead
Intuitive is more than two decades into its development of robotic-assisted surgery, and management said on the third quarter earnings call that its da Vinci X and Xi models now have dozens of clinical use cases ranging from general procedures to specialty uses like transoral surgery.
The da Vinci single port system (dubbed da Vinci SP) is also still early on in the approval process in most countries with just 89 in use in the U.S. and South Korea, according to management. Same goes for the new Ion machine used for lung biopsies, with only 98 units sold and installed so far. There is plenty of room for Intuitive to continue expanding its reach in the next decade.
Plus, Intuitive’s capabilities include things like virtual reality training, hospital operations management, surgery outcome analysis, and machine learning for scientific discovery. Services like this represented 17% of total revenue in Q3.
We believe the healthcare industry is ripe for disruption, and given Intuitive’s position as a leading surgery technologist, there should be no shortage of opportunity as the movement in healthcare digitization continues. We remain owners of this top healthcare stock with the ultra long-term in view.
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