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Friday File: Buying at lower prices, Selling at higher risk levels

Updates on Power REIT, Intuitive Surgical, Shopify, and some Data Infrastructure stocks and more Real Money Portfolio news...

By Travis Johnson, Stock Gumshoe, January 14, 2022


Among the Real Money Portfolio companies, Intuitive Surgical (ISRG) is usually the first to release substantive financial updates each quarter… so getting that ISRG update always feels like the official beginning of earnings season for me. And I don’t often write about this one, so please indulge me for a bit as we go into the story, for those who are new to the stock.

Intuitive Surgical (ISRG) is the overwhelming market leader in general purpose surgical robots, primarily with their several generations of da Vinci surgical robots that have been used in hospitals since 1997. They make money both by selling the machines, which are huge and expensive (about $2 million, so much less than a new MRI machine but still a big capital outlay for most hospitals), and, more importantly, by selling the attachments and accessories that are used in each surgery (they have enjoyed the fruits of the “razor and blade” business model — or if you prefer, “printer and ink cartridges,” the recurring revenue has a much higher gross margin than the sales of the machines themselves).

Revenue has been significantly hurt by the pandemic over the past two years, mostly because hospitals have been periodically overwhelmed — which has two major impacts: it cuts down on the number of “elective” surgeries, since anything that could be postponed generally has been; and it puts hospitals into emergency mode, reacting to the pandemic, and that makes it harder to sell them big pieces of equipment like a da Vinci surgical robot.

Still, the general trend of procedure volume is starting to recover, even with the Omicron variant hitting hospitals again in December (and probably for the next month or two to start 2022), and ISRG helpfully provides some context in including the two-year trends in their update. The compound annual growth rate in procedures completed with the da Vinci was 14% from 2019 to 2021, and, though they of course don’t know how the year will unfold when it comes to the mutating virus, they are currently forecasting for 2022 to be similar, with growth in the range of 11-15%. Cash flow closely follows procedure volume over time, because each procedure requires specialized instruments and accessories, so that revenue line saw 13% compound annual growth from 2019 to 2021, and that’s what drives their profit — the volume of system sales, ...

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