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Why Intuitive Surgical, Inc. (ISRG) Stock Doesn’t Offer Risk-Free Growth

ISRG is the pioneer in robotic surgery, but will patent expiration be its doom?

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A stock that recently came on my radar is Intuitive Surgical, Inc. (NASDAQ:ISRG). ISRG stock is known for its da Vinci surgical systems, which translate the natural hand movements of a surgeon and then performs the corresponding surgery. This is pretty nifty stuff, and is used in several different types of surgeries, from general surgery to urologic, gynecologic, cardiothoracic and head and neck.

It’s particularly cool because Intuitive Surgical also manufactures instruments that have wrist joints and even staplers.

ISRG stock was up big after-hours on Tuesday because the company had a great quarter. Let’s look at those numbers and then talk about Intuitive Surgical stock itself.

Intuitive Surgical Earnings Results

Worldwide procedures were up 18% compared with last year’s Q1, with a lot of the growth driven by more general surgery in the U.S. and urology surgeries around the world. Furthermore, 133 systems were shipped, up more than 20% over last year’s 110. Revenue was up 13% to $674 from $595 million.

Net income popped by 33% to $180 million, or $4.66 per diluted share, compared to $136 million, or $3.53 per diluted share last year.

With $3.147 billion in cash and investments, and no long-term debt, Intuitive Surgical could not be in a better financial position. That’s about $81 per share in cash that one can back out of the $789 stock price, to yield a net-of-cash price of $708, or a market cap of $27.2 billion. That means ISRG stock is trading at a price-to-earnings ratio of 35. That’s not unreasonable at all for a company growing net income at 33% YOY. In fact, given that this is a growth stock with a price-to-earnings-to-growth ratio of about 1.0, one might even consider it a “growth at a reasonable price” stock.

Okay, so there are the numbers. What about the company itself? The good news is that technology like this is the wave of the future. Intuitive Surgical is what I would call a company in a sunrise industry, with RBC Capital Markets saying robots only own about 5% to 10% of the total market. These robotic systems are great for doctors and patients alike, as they are intended to create less invasive procedures.

This naturally leads to two questions: What kind of competition is on the horizon, and what about patent protection?

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