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

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.

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

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?

Bottom Line on ISRG Stock

TransEnterix Inc (NASDAQ:TRXC) is a penny stock that is hopeful of Food and Drug Administration approval for its Senhance surgical robot later this year, as it rolls out a few systems in Europe. TRXC has barely any revenue yet. Medtronic plc. Ordinary Shares (NYSE:MDT) has been jabbering about a surgical system that it has not yet unveiled. Titan Medical Inc. (OTCMKTS:TITXF) is a Canadian company that is aiming for FDA approval in 2018 for its system. There are several other companies scattered across the world working on different robotic applications.

At the moment, however, ISRG appears to have the biggest head start and is planning to release a lower-cost system later this year. The cost-per-procedure will also be lower. Also, the system will have a “haptick” feedback feature, which means the surgeon will be able to “feel” the tissue or bone he works with, rather than just using a joystick.

The real threat, then, is patent expiration. ISRG stock lost several patent protections at the end of 2016, with more on the way in the years to come. Some of this is pretty basic stuff, like controlling the robot with a remote controller. What investors need to research is whether ISRG stock can survive these expirations or patent challenges. Investors may remember VISX, the laser-eye-surgery system that owned the market for several years, only to have their central patent fall to the International Trade Commission.

That’s the key going forward, and the place to continue your research before pulling the buy trigger on ISRG stock.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/intuitive-surgical-inc-isrg-stock-doesnt-offer-risk-free/.

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