Intuitive Surgical, Inc (NASDAQ:ISRG): Leading Healthcare Stock to Look Out For
Jack Lee, Dealing
Jack Lee graduated from the University of Nottingham with a Bachelor’s degree in Business Economics and Finance. Companies with unique business models excite him. He is highly passionate about sharing his findings to help clients benefit from long-term high growth stocks. Thus, he is always on the hunt for stocks with value and potential for high growth.
On 1 Feb 2023, the Federal Reserve raised interest rates by 0.25%, bumping the federal funds rate to a target range of 4.5- 4.75%. With this move, it was the Fed’s 8th consecutive interest rate hike in efforts to rapidly reduce liquidity in the financial markets, tamping down high inflation rates. [1]
Generally speaking, almost everyone has been affected by the high interest rates, either directly or indirectly. The interest rate hike has affected the aggregate demand in the market, slowed down the economy. The US stock market was no exception, with the S&P 500 dropping from approximately 4,600 points to 4,000 ever since the start of the interest rate hikes. Undeniably we are in a bear market right now due to the high interest rate environment. In this market downturn, it is time for investors (especially long-term investors) to look for a potential stock that has strong fundamental worth.
Healthcare industry: US surgical robots market
With quantitative tightening and rising interest rates, we need to look for an industry that can thrive in this market downturn. The healthcare industry could be one viable option. Known as a defensive sector, the demand for healthcare is typically not affected extensively by economic conditions, as everyone would still require medical treatment for an illness regardless of the macroeconomic environment.
Furthermore, the healthcare industry is changing immensely as it seeks to improve care quality. Minimally-invasive surgeries hold massive potential as they are considered the best alternative as opposed to open surgeries.
We expect the rising demand for surgical robotic systems to continue in the future, with the implementation of technological innovations and advancements in minimally-invasive surgical procedures. In addition, the US surgical robots market are still considered a blue-ocean sector as there are not too many players involved in this industry.
According to the Grand View research, the US surgical robots market is predicted to have a compound annual growth rate of 17.9% from 2022 to 2030.
Source: Grand View Research [2]
Intuitive Surgical, Inc. (NASDAQ:ISRG)
Intuitive Surgical, Inc. (Nasdaq:ISRG) is one of the key players which specialise in the robotic-assisted surgery device market. It holds the highest market share in the industry.
As a pioneer and global technology leader in developing manufacture and marketing of robotic-assisted surgery products, it also has one of the largest moats and best fundamentals with almost 3 decades in the sector.
ISRG was the first company to have its robotic-assisted surgery device, the Da Vinci Surgical System, cleared by the US Food and Drug Administration (FDA) for the market.
The Da Vinci Surgical system allows surgeons to perform minimally-invasive surgeries, significantly benefiting patients. As compared to traditional open procedures, minimally-invasive ones result in less scarring, less bleeding, shorter hospital stays and faster recovery.
Strong brand stickiness
ISRG has strong brand stickiness as it is trusted and reliable. Furthermore, there are also very few substitutes available in the market. Currently, ISRG could be one of the best robotic-assisted surgery devices in the market. With quality comes price (USD 500,000 – 2 mil), it is highly unlikely for a customer to switch out of ISRG once committed.
Furthermore, the complicated system requires a great amount of time and effort to maximise utility, discouraging customers from swapping to a substitute.
Fundamental
Source: ISRG [3]
We can see from the table above that ISRG has a healthy diversified revenue from selling products and services.
The revenue for ISRG is equally split, with 56% of its revenue derived from selling instruments and accessories and 44% derived from providing systems and services. With this relatively equal split, it is able to effectively diversify risk. Providing disposable accessories, systems and services play a significant role in generating profit. The disposable accessories, system and service that are required for the Da Vinci Surgical System act as a stabilizer for ISRG to generate continued profit from existing customers.
The ISRG business model has a powerful ecosystem which enables it to see exponential growth on their revenue. After purchasing the device, customers need to spend on disposable accessories, system maintenance and subscription to the services provided by ISRG. This continued spending provides ISRG with a strong and stable source of income that would keep it afloat even in bad economic situations, in the long run.
Source: Morningstar [4]
Looking at the revenue of ISRG from 2012 to 2022, its revenue has increased by 12.51% in the 10-year period, 16.12% in the 5- year period and 15.31% in the 3-year period.
ISRG has been performing well, as evident from its steadily increasing revenue (since 2015). However, revenues decreased by 2.68% in 2020, following the fall in demand for surgical procedures and shortage of manpower in the manufacturing facilities caused by the COVID-19 pandemic. Furthermore, the lockdowns and shutdowns in major markets across the globe negatively impacted the supply chain, restricting the manufacturing of surgical robots in 2020.
The robotic-assisted surgery market is expected to grow as there is a growing demand for automated instruments with high accuracy and less human effort since the COVID-19 pandemic. An increasing trend has been observed in automated instrument adoption after the normalisation of COVID-19. This may be due to the effect of the COVID-19 pandemic, during which many become more conscious about life-threatening viral infections and contamination.
Source: Tradingview [5]
Looking at ISRG’s profitability ratio, the fundamentals are relatively strong. ISRG has been performing very well for the past 7 years as their Return On Assets has been a minimal of 10 %. It has also shown a minimal 11% Return On Equity. Based on its Return On Assets, it is evident that assets have been efficiently used to generate profit.
ISRG also has a very strong Return on Invested Capital, gross margin and operating margin. Apart from this, ISRG has little long-term debt and its debt to asset ratio is 0.01.
High barrier to entry
ISRG dominates the robotic-assisted surgery device market, with nearly 80% market shares as it was the first to be approved by the US FDA.
The industry has a very high barrier to entry as other companies will need a lot of time and investment funds to create a robotic-assisted surgery device that can substitute the one ISRG already has in the market.
As such, ISRG is irreplaceable in the market, in the short run, making it a safe and stable investment. However, there are potential competitors, such as Johnson & Johnson and Medtronic.
According to Evaluate Vantage, Medtronic’s Hugo system is a close substitute to ISRG’s Da Vinci Surgical system in the Europe market. [6]
Conclusion
In short, the healthcare industry is worth looking at in this macroeconomic environment, especially the robot-assisted surgical robot market.
Intuitive Surgical is poised to benefit with revenue potentially amounting to billions of dollars. Although Intuitive Surgical has very strong fundamentals and a good business model, the stock is still considered a high-risk investment as it has a very high valuation and volatility.
The high valuation may not be sustained as competition increases. Investors should also consider the uncertainty of the macroeconomic environment and government healthcare schemes & subsidies as well, but the company is definitely worth considering.
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