Unless you’ve needed surgery in the past few years, Intuitive Surgical may not be a familiar name, but they’re the global leader in robotic surgery and a pioneer in the field since 1995. Robotic surgery has been steadily improving over the last two decades and is becoming the gold standard for some types of surgeries.
Adu Subramanian recently published a thorough deep dive into Intuitive Surgical on his Substack, covering its history, business, and competitive advantages. This week, we sit down with Adu to talk about his extensive research in this exciting growth area and what he thinks is in store for Intuitive and the robotic surgery space.
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Wednesday the 25th of August.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: We’ve covered almost all of the stocks in our model portfolio of 2021 in detail. We’ve only got two left, Disney and the one we’re going to tick off today, Intuitive Surgical. So listeners, unless you’ve been unlucky enough to need surgery in the last couple of years, Intuitive Surgical is probably not a familiar name, but they’re the global leader in robotic surgery systems with installations all over the world.
Albert: Yeah, it forms a big part of both our personal portfolios. In fact, Luke has vowed to never sell his Intuitive shares, and we’re sure to test his resolve in today’s episodes. And today, we are delighted to have Adu Subramanian on the podcast. Adu has a Substack on which he has recently published a compelling review of Intuitive Surgical’s history, business, and future prospects. Welcome, Adu.
Adu: Hey guys, how’s it going?
Luke: Adu, great to have you on the pod. Thanks so much for joining us.
Adu: Thanks for having me on.
Luke: So, before we get into Intuitive Surgical, and this is a company that’s very, very close to my heart, I did want to give a quick shout out to a recent stock purchase I made. Alb, you know I bought a 2% stake in Airbnb just a couple of weeks ago.
Albert: Yeah, you mentioned that on the podcast I think.
Luke: Well, their CEO, Brian Chesky, has really impressed me today. I saw on Twitter that they’re paying for the temporary accommodation of Afghan refugees globally. They’re paying their hosts as part of something called their airbnb.org initiative. And I’ll be honest, I hadn’t heard of airbnb.org when I became a shareholder, but this kind of leadership from the companies I’ve got stock in makes me really proud to be investing in that way and making the world a little bit better. Well done, Brian.
Albert: Yeah, it’s good news and a lot of companies these days are showing more social responsibility and It’s a good thing.
Luke: You got any Airbnb stock, Adu?
Adu: No, I don’t. It’s outside of my circle of competence is the way I’d say it.
Luke: When’s the last time you stayed in an Airbnb?
Adu: It’s been a while. Because of coronavirus, I haven’t travelled much.
Luke: Yeah.
Adu: Probably three years.
Luke: I don’t know if it’s different for the US and the UK. Airbnb seems to be the only thing I’ve done with friends over the last year or so. As you say, like regular travel’s just off. Hotel chains have been closed down. They’re not very welcoming unless you’ve got some real solid reason to be traveling. But Airbnb is open for business and it’s a great way to just hang out with friends and have fun.
Adu: Yes, fair point. I know that in the US, hotels have been open if you’re going to be traveling, at least once the vaccine has been out and people started traveling so.
Albert: I don’t know if you listened to one of our episodes a few weeks ago with the CEO of Mode, but he was telling us that hotels and possibly Airbnb will bounce back in business. Apparently, all hotels are now booked up in London due to the demands of companies asking their employees to come back to the office.
Adu: Wow.
Luke: And I read a stat today that companies are spending more on Airbnb than they are on office space in some sectors at the moment.
Adu: That’s really interesting. I’d also see occupancy rates for hotels back up to the 90% of 2019 levels.
Luke: The world’s reopening all over the world. It’s really good news.
Adu: That’s awesome news.
About Adu
Albert: Let’s get back to our main topic of intuitive Surgical, and before we dive into that company, why don’t you tell us a bit about yourself, Adu?
Adu: Sure. So, I’m 19 years old and studying at UC Berkeley as an undergraduate, majoring in bioengineering. I plan to go to medical school after I graduate and hope to keep on investing on the side. I’d always written about stocks and it really helped me frame my thoughts, but I realized that writing and publishing did something more and allowed for more discussion with people, more feedback on what I got right and what I got wrong. So I started this newsletter, not just as a way to gain attention, but rather as a way to basically write down things and frame my thoughts and do interesting research.
Luke: I’ve been an Intuitive shareholder for 15, 16 years now. I’ve never read anything as good quality as the research that you put out a month ago, which is what caused us to get in touch. And as you say, when we opened the Zoom, I was a bit surprised to see what a young guy you are. This is definitely some very mature, experienced thinking.
Adu: Thank you. I’m probably not as mature and as experienced in person as you might think from the writing! Still a college kid.
Luke: Albert and I can be pretty immature too.
Albert: Yeah, on a weekly basis, I think, on the podcast.
Actually, last week’s guest told us he jumped out of planes in his spare time. What do you do in your spare time, Adu?
Adu: Yeah, I like playing basketball whenever the courts were open and now that they’re reopening, it’s pretty nice. I like to go to the gym, lifting weights. Frankly, with being a student full-time, investing is kind of what I do in my spare time.
Albert: I think that’s how we started. We started investing in our spare time about 20 years ago.
Luke: Not age 19, and that’s one of my big regrets. I’m going to quote Brian Feroldi yet again. I think on Twitter today, he said, “I wish I’d started investing sooner. That quote is attributed to everyone.”
Adu, you launched your Substack, I think, back in February this year, but I see you’ve been all over FintTwit for a couple of years. I was digging back through your back catalogue of tweets. How did you actually get started with investing and company analysis yourself?
Adu: It’s a really interesting story. When I turned 17, my senior year of high school, my dad said, “Well, I can either get you a car, or you can start investing with the money that I would’ve gotten your car with.” And I said, “Well, I’d rather just start investing.” So he gave me $20,000 and that’s where I started with the investing.
Luke: Nice.
Adu: That was the first step. And then when I got to college, I joined the undergraduate investment group here on campus, and I got really into researching stocks and that type of stuff after about a year and a half of I’d say, just playing around, playing it safe. Not really making much money, not really losing much money. This year, very kindly, he had set aside money for my college tuition and, actually, I asked him to use that to invest. So I took $200,000 and invested with that, and in the last year, it’s been kind. I’ve doubled it and paid for my tuition, pretty much investing. So that’s pretty nice. That’s my story so far.
Luke: That’s awesome. You were YOLOing your education, potentially.
Adu: Yes, I was… that was the thing is my dad was willing to do it because I hadn’t lost any of the $20,000. It was like, “Well, it’s your money and if you lose it, you are paying for college yourself.”
Albert: High-risk, high-reward.
Luke: Yeah, exactly. You’re not doing a degree in finance, right? You said healthcare.
Adu: Yes, bioengineering, that’s my degree.
Luke: Are you sure you’ve chosen the right sector?
Adu: I think through that a weekly!
Luke: Well look, hey, investing – it’s a nice little arrow to have in your quiver that goes well with any other skillset. You can combine investing and become an expert in a niche domain very easily.
Adu: Exactly. Because I’m a bioengineer is actually why I’m such a good investor. For example, I do research at UCSF and from my most recent piece on Substack, it was on an organ transplant company and I was able to use my UCSF email to email one of the transplant surgeons and talk about the product and things like that. And that’s simply because I have access to this. If I was a finance student at 19, I probably wouldn’t have access to those same things.
Luke: It’s fantastic. That’s TransMedics, right?
Adu: Yeah, TransMedics, that was the company.
Albert: Yeah, it sounds like you’ve been focussing on healthcare companies, Adu. Are there any other sectors or stocks that you focus on?
Adu: I tend to like healthcare companies because one, I like to fish in ponds where I understand the companies best, and by the nature of it if I’m investing in a semiconductor company, it’s either speculative because I know the people on the other side of the bet are smarter than me. So that’s why I like to focus on healthcare, that’s one sector. The other types of companies I’d like to focus on are smaller companies like microcaps. Specifically, it’s for that same reason is that the people I’m playing against, there’re more market inefficiencies to exploit than if you’re fishing in larger companies that are more well-known and well-covered.
Luke: But at the same time, you’re out there educating your competitors if you see it that way as a kind of zero-sum game. Are you damaging your own intel by sharing things on your Substack?
Adu: Uh, well, I don’t feel like I’m playing with enough money to make a difference. The dream is that eventually if I get big enough that if I published something and it makes a difference on the stock, I feel like, at that point, I need to stop worrying about the investing and start monetizing the Substack!
Albert: Absolutely.
Luke: That’s nice, yeah. Being on FinTwit, I found it an invaluable resource personally. There’s a lot of smart guys and girls out there who are very happy to share their own insight and intel. As we say on our website, we’re not doing this to monetize Telescope Investing; we’re doing it to have conversations exactly like this one with yourself.
Adu: Exactly. The network you get from talking to other people is so much better than anything else.
Intuitive Surgical
Luke: Well, maybe it’s time to talk about Intuitive the stock.
Albert: Actually, Adu, can you give us a quick overview of what Intuitive Surgical do?
Adu: Sure. So Intuitive Surgical is a robotic surgery company that sells robotic systems and the disposables used in surgery. So their business model is they’ll sell this thing called the Da Vinci system, which you can imagine is this big robotic thing that can be wheeled around to different rooms to do surgery on patients. And then in each surgery that’s done, they sell disposables, which is a form of recurring revenue. So you’ll imagine they have these two sources of revenue where you sell it upfront, a $2 million device, and then every surgery, you get $2,000.
The other part of their business model is they also signed yearly maintenance contracts with hospitals. Just basically keep this robotic system updated, keep everything smooth and running. That’s their business model, how they make money.
Albert: I believe their business is doing really well and they’re quite flush with cash at the moment with about $5 billion in cash and cash equivalents.
Adu: Yeah, so the best part about this, I’ll call it a razor-blade model is where you sell upfront and then disposables, is that those disposables, once you hit a certain amount of revenue, they just drop down straight to free cash flow, where you have margins on those disposables of 50%. And if you don’t have anything to reinvest it in, they can’t do anything with the cash that they’re making because they’ve made so much of it, is really a testament to how well the team there has performed.
Luke: Yeah, nice business model for them. But I did notice in your article, you drew attention to their monopolistic behaviour. Like I love this company, I love the CEO, but are they being a bit naughty perhaps and holding hospitals to ransom with the cost of the disposables?
Adu: So, this is an interesting question because they are monopoly 100%. There is no real competition to them. And most monopolies you’ll see are regulated, so if you have utilities, you can’t charge higher prices. The thing with Intuitive is there isn’t necessarily any regulation, so they’re able to charge as high prices as needed, as long as hospitals will keep buying.
But I will say this, competition is on the horizon, so there is a point at which they can’t charge any more. And any time you talk to a hospital exec, they’re going to think that they’re being gouged by the suppliers. Intuitive’s go-to-market isn’t necessarily nefarious but they are leveraging their market power in an effective way to make cash.
Luke: And they’re doing a pretty good job of that from the look of the share price over the last couple of years.
Adu: Yes. You said you’ve held it for 17 years. It’s great 17 years there.
Competitive landscape
Albert: Yeah, they haven’t had competition so far, but with the market increasing in size so much in the past few years, some newer competitors have come up such as Medtronic and another company called Vicarious Surgical. Do these companies pose a threat?
Adu: So, the thing about the new competition is they’re always quote-unquote, on the horizon. If you notice Medtronic, Johnson & Johnson, lot of soft tissue robotics companies have really struggled to get to market with a viable product because they’ve intended to launch in 2019, pushed back to 2020, pushed back to 2021, and now it’s pushed back into 2022.
And what they’re learning is that they may have inroads with hospitals, these larger companies at least, and I’ll touch on Vicarious in a second, but the larger companies have inroads with hospitals and they have a lot of cash, but there’s certain nuances to robotic surgery that Intuitive Surgical struggled through in the early days, and now they’re having to struggle through it again. Whether it’s the software has to gel, the hardware has to work with the software, and the physicians have to know exactly what instruments to use. Nuances that aren’t necessarily easy to work out, therefore, they’ve delayed constantly.
There is competition, quote-unquote, always on the horizon. So I would be worried if I look out to 2030, that there’s going to be competition there. But if I look out to 2025, I’m not too worried. On the topic of Vicarious, I actually think that Vicarious is probably even further behind than Medtronic and J&J. But if they do work out, it’s something that could really revolutionize it because I do believe they’re working on basically augmenting a surgeon’s capabilities with AI and different things like that.
I actually believe since Vicarious is such a small company and if they had something really legit currently, Intuitive would just buy them because intuitive has enough cash to take over a company that’s worth $5 billion. And if Vicarious’s tech is so good, I would believe Intuitive would just buy them. That’s why I don’t think Vicarious poses a huge threat just because of their product is intended for launch in 2023. Like I said, products that were intended for launch in 2018 have now been delayed five years.
Luke: Yeah, great point.
Albert: Good to hear from an Intuitive Surgical shareholder’s point of view, but I have to say that Vicarious Surgical is a bit of a creepy name. It’s as if the doctor is secretly enjoying slicing people up.
Adu: Intuitive Surgical sounds better.
Intuitive’s beginnings
Luke: As you said, Adu, I’ve been an Intuitive shareholder since 2006, and actually, I didn’t know their origin story, and I think you bring that out quite nicely even with the title of your Substack post Aimed for the Heart, Hit the Prostate. Do you think you could explain that for us?
Adu: Sure. So Intuitive Surgical was founded with the intention of doing heart surgery. In its early days, it wasn’t really adopted by heart surgeons because they had more effective techniques and the use case wasn’t really there. The hospitals would pay $2 million and then basically use it as a coat rack similar to if you bought an elliptical at a yard sale. It’s in the basement, you’re hanging your jacket on it, you’re not using it. It’s similar to the Intuitive Surgical robot that they buy.
What really became Intuitive’s saviour is prostatectomies, and a prostatectomy is a really difficult surgery to do and you can’t do it minimally invasively. So what prostate surgeons were able to do with robotic surgeries, they were able to do these really complex surgeries where you have to reach into the groin and you couldn’t do it laparoscopically previously, which is just the other type of minimally invasive surgery. You couldn’t do it that way and they took Intuitive Surgical’s robot and they realized that they could do really complex surgeries really easily.
And it started in Detroit and it really spread far and wide in the early 2000s, and you could see that market share just take off. And that right there is what really sustained the company in his early days and allowed it to expand. And you can see that as it expanded, it even expanded to gynecological surgeries, which is basically prostate in a female sense, right? So anything in that groin area that’s difficult to get to, it can be done robotically a lot better. And that’s why it’s Aimed for the Heart, Hit the Prostate.
Robotic surgery
Albert: In your Substack article, you referenced an article in the New Yorker titled Paging Dr. Robot and it said some physicians viewed robotic surgery as a pretty technology in need of a problem. Do you think that’s a pretty dated view these days?
Adu: I think it really depends on who you ask. So if you ask a prostate surgeon or an OB-GYN… my mom’s actually an OB-GYN, so I was able to talk to her about this, is that she does 90% of her cases robotically because it’s just better for outcomes. If you look at the new types of surgeries that they’re trying to push in terms of certain types of hernia surgery – just pick different soft tissue surgeries – laparoscopic surgery has equal outcomes as robotic surgery but with less cost. That’s why some physicians will say, they’ll just blanket robotic surgery as a whole is a really cool technology that is just searching for a use case. And the thing about robotic surgery that makes it so cool isn’t that it’s going to be the best right now, it’s that it’s competing against a static solution of laparoscopy.
Laparoscopy is not getting any better but robotic surgery is. So some physicians view robotic surgery is a pretty technology in need of a problem. When in reality, that technology is getting so much better that eventually, it’s going to be the ideal solution. That’s the hope. It may not be the best right now and some physicians have recognized that. Physicians may not recognize that in the future, as you’re allowed to get more surgery, as you’re allowed to get more data, as you’re allowed to put different technologies on there, whether it’s augmented reality or virtual reality or different types of tools, the robotic surgery outcomes will get better.
Luke: Yeah, absolutely. Da Vinci on the latest platform went to a single port machine. That’s not the kind of thing you can do with laparoscopic surgery, right? You have to have multiple entry points to the patient.
Adu: Yeah, exactly. So that single port system is really interesting because you can’t do it laparoscopically. It’s not a huge use case currently, but who knows? Maybe five, 10 years.
Luke: Yeah. And how you said your mum does robotic surgery. Is she a Da Vinci user?
Adu: Yes, she is. At our local hospital, she’s an OB-GYN. She does a lot of hysterectomies on their Da Vinci.
Luke: She’s a fan of the platform?
Adu: Yeah, she loves using a robotic leash. If you’re doing a difficult surgery and you’re not doing it on robotics, you’re lost at this point as a gynaecologist. It’s just not going to work out well in terms of outcomes. If it’s a simple surgery, fine, you can go either way, but for complex surgeries for people who might have multiple conditions, robotic surgery is the way to go.
Total addressable market
Luke: So, you did a pretty deep analysis of the financials of where Intuitive could get to. And one of the key factors in that is the percentage of procedures that might sit as part of their total addressable market. Do you have a view of the end game in terms of the percentage of all treatments that Intuitive could potentially support?
Adu: Sure. So, one thing I would like to segment here is soft tissue surgery versus joint surgery. Some valuations will say robotic surgery is only 2% of all surgeries. For Intuitive, that’s less relevant because only 20 million of 35 million (a little bit more than half) is soft tissue surgery, which is working on muscles, it’s working in the abdomen, that type of surgery. And that’s where Intuitive plays.
I think it really depends on the timeline. If I say in 2080, I would say a hundred percent. How that timeline goes, it depends on the development of robotic surgery platforms. Currently, they have 1.2 million procedures on the robot, which gives them one out of 20 of all soft tissue surgeries. By 2030, I’d say they can get to 6 to 8 million. Even then, it just depends on making those outcomes better, because as competition comes up, they can’t have worse outcomes compared to laparoscopy. They need to make those outcomes better.
Luke: I guess there are other companies in the robotic surgery space with platforms that are effective for joint surgery. I think Albert and I used to be investors in Mako Surgical, the guys who do knee surgery, makoplasty. I think I read the other day they’ve just launched a hip replacement platform.
Adu: Yeah. So, Mako is one of those companies, it’s cutting edge. Zimmer Biomet is another one. Stryker owns Mako. There’s different platforms out there doing hip surgery, joint surgery, and they’re very good at what they do.
Luke: Between the joint robots and the soft tissue robots, that’s the whole market sown up.
Adu: Pretty much. You can pretty much segment it like that.
Network effects
Albert: Adu, in your article, you talked about moats that Intuitive Surgical has for its business. And one of the moats that you talked about was the moat with students, where the Da Vinci system is in 100% of top residency programs. I think that could be a big network effect where new doctors come out already trained to use robotic surgery. Are you seeing any evidence that younger doctors are more likely to use robotic surgery?
Adu: I couldn’t find anything official in terms of a citation. I tried to look, but yes, if you talk to anybody in the field, at least my mom agreed here and a couple of the other doctors agreed, that younger people, they’re used to being technologically savvy and they’re much more used to using robotically-enabled surgery. And it’s funny, some doctors, some of the older doctors actually, getting a little concerned about younger doctors not being able to do regular surgery.
Albert: It reminds me of some advice I heard a few years ago that fields like medicine progress so quickly, all things being equal if you have a choice of seeing an old doctor versus a young doctor, like you should always choose the younger one because they will use the more modern techniques, whereas the older one would use the old-fashioned techniques.
Adu: Yeah, I think there’s a sweet spot there where you’re willing to accept the new techniques, but you’re not fresh off the boat versus being so set in your ways. There’s a sweet spot in there where people are willing to adapt and use the new techniques and they’re experienced enough to do a great surgery, great being a great doctor.
Albert: So what you’re saying is go for the middle-aged doctor.
Adu: Exactly.
Luke: We won’t be cheeky and ask you which of those camps your mum falls into just in case she listens to the episode.
Albert: Yeah, this kind of reminds me of how like Apple target students with its products and how Walmart targets mothers-to-be. Like if you get them early, they’ll stay with you for life.
Adu: I compare it to using Excel. If an Excel competitor came up, it’s a life and death Excel model, where once you’re trained on it, you really don’t want to switch.
Luke: Albert and I have got some life-or-death Google Sheets. I think I’m stuck with that now. There’s no going back to Excel.
Albert: It’s funny you mentioned that because I used to use Excel, but I’ve completely moved over to Google Sheets now.
Adu: Really? That’s interesting. I would guess that the training difference on robotic surgery might be a little different than switching over from Excel to Google Sheets.
Luke: Yeah.
Albert: There’s two reasons why I switched to Google Sheets. One, it’s free and two, it has the googlefinance function.
Growth drivers
Luke: Adu, as I said earlier, you went pretty deep on your own valuation model and I think you came to the conclusion that a lot of Intuitive’s growth is already priced into the share price, and the stock’s likely to grow 6% per year over the next 10 years. And so that took it off your radar as a potential investment for you. What could they do to change your view do you think?
Adu: I think for them to change my view, it would have to be increasing monetization in terms of the disposables that they have. So currently, the per surgery revenue is $2,000. If they can increase that. That’s something that I would not see happening at all. Like currently, I believe that will come down over time. That’s something that factored into basically how I made my model. If they could change that and put some serious tailwinds behind that, I think that would make sense.
Another thing could be is if they start expanding into new markets. If we start to see published outcomes for robotic surgery is turning out to be better for different soft tissues surgeries and they start expanding. That would be another thing.
And the third thing would be if I see new technology developments added on robotic surgery. So even as competition comes up, they just keep on innovating such that whether it’s AI or whatever it may be, whatever the next thing on robotic surgery is. If they can do that and they accelerate growth past 25% and they lay out a path to getting a certain market share in 10 years. Those are the things that would change my mind. I just don’t think that those are three things that are going to be immediate and that’s why I didn’t choose to invest.
Albert: Yeah, Adu, I found your article to be quite compelling and I haven’t gone through your valuation model yet, and I do plan to do that, but I am more hopeful about Intuitive’s prospects. For example, they could add more types of surgeries to their roster. And while I don’t plan to add any more shares, I wasn’t planning on selling any either. I guess if your thesis plays out, I might change my mind.
Adu: Yeah, the thing about the financials is that if you’re looking for something that’s going to compound, in my opinion, at 7% for 10 years, this is a great option. If you think the S&P is not going to return 7% or whatever your benchmark is, this is a great, safe option to get, I’d say, slightly less than historical market return. Just because I think they have such great moats, they will continue to grow revenue at a stable rate. But since their valuation is so high, that valuation will eventually compress, therefore, the return will come down naturally from their revenue growth rate.
Luke: I feel like I’m kind of emotionally committed to this one in a bit of an unhealthy way. It was basically the first proper individual company stock I ever bought. I trimmed Netflix on the way up. I trimmed Shopify on the way up. Damn it, I’m just going to stay on this ride. I’m not going to let go of this one. So, that’s not really an investing thesis; that’s more investing from the heart a little bit, but I totally hear you on your position around their growth.
Adu: Yeah. I think they have opportunities to continue growing. And like I said, if you look out and you take a long-term horizon, I don’t think you’re going to lose money on this one.
Albert: It’s good to hear, Adu, and if you can offer me an investment that guarantees 6% or 7% per year for the next 10 years, I’ll take it.
Luke: I didn’t hear Adu guaranteeing anything there, Albert. There’s no holding to…
Albert: Well, I’m holding Adu to this. If it doesn’t return 6%, I’m calling him.
Luke: You better call his dad.
Adu: Yes, in 2030, if it hasn’t returned 6%.
Data advantage
Luke: It’s interesting that you bring up the topic of growth avenues and how they might shape in the future. I like your comment around advanced robotic surgery enabled by AI and big data. And I think you comment that the robot could become a better tool for the surgeon, augmenting a surgeon’s capabilities.
And in your article, you talk about the data advantage that Intuitive could have. I hadn’t really thought about that until I saw that comment from you. That is really interesting. That could prove to be very prescient.
Adu: Yeah, the data advantage is in two parts. One is just general robotic surgery is every surgery’s tracked and it allows a surgeon to be better because laparoscopy, you’re watching the video and you’re thinking, okay, what did I do here? What did I do there? And you have to manually figure out what’s going on and how to make yourself better as a surgeon. Robotic surgery, you know exactly where the tool went, you know what the tool hit, and now Intuitive has all that data on every surgery, whether it’s a hernia, prostate, gynaecological – pick a surgery – they have all this data.
With that data, they have the best opportunity to augment a surgeon’s capabilities because currently the way I see it is that robotic surgery is a hammer and it’s up to the surgeon to wield it. Whereas in the future, it might be a collaborative interface where it’s not just a hammer, it’s much more advanced in the way that it can be used. It’s a toolbox that helps guide you. It’ll help you identify anatomical structures. That’s one thing that could be great. I don’t think robotic surgery in terms of the machine will do it ever happens, but I do think robotic surgery in terms of the machine will help you do it is eventually going to be the future.
Luke: Or even perhaps prevent you from doing something you shouldn’t.
Adu: You referenced the New Yorker article, Paging Dr. Robot. It’s not going to be Dr. Robot, it’s going to be much more, you did this a different way in your last 10 procedures, are you sure you want to do it differently now? And it’s just simple. It’s just a simple thing on the screen that it might say, hey, you did this previously a different way, I see how it’s a similar set-up, this is where this anatomical object is located, maybe change our approach. And the surgeon will say maybe yes, maybe no, but it’s still in the end up to the surgeon. The robotic surgery may just reduce the amount of mistakes and that’s where the outcomes could get better.
Luke: That’s awesome. They’re a bit like Tesla. They’re out there actually clocking up mileage, gathering data. If they can find a way to actually do analytics on previous surgeries, tagged them in some way, and draw inferences about what’s successful and what’s not, that’s really powerful.
Adu: Agreed.
Albert: Adu, you mentioned that article in the New Yorker, Paging Dr. Robot, and I saw an interesting part in there that said that this company called Digital Surgery working on AI for robotic surgery, and they’re saying that their computers are now at the level of medical school students, which I think is pretty high. Are they exaggerating?
Adu: Yes. I think in a word, yes. Any time I hear AI and anything to do with healthcare, maybe I’ve just been soured by my experience, I just think that there’s a lot of hype out there around these new technologies and a lot of people make different claims. But healthcare’s slow-moving. You have to verify, you have to trial, you have to verify, you have to trial, you have to verify. AI at the level of medical students, how do they define this? In what context is this defined? Have they tried on human subjects? There’s a lot of different questions that I would have behind that claim. More for an article than it is for actual surgery.
Remote surgery
Albert: Intuitive Surgical came out of efforts to build a remote surgery system where surgeons could operate on people remotely on the battlefield. While it was abandoned because the bandwidth wasn’t there back then but do you think remote surgery is possible these days?
Adu: I think it depends on your situation. Remote surgery is possible and they’ve done it before, but I don’t think it’s worth it. I think that surgeons are, generally, really good at what they do, and the amount of people it might take to set up. So if you have to set up an extra three people to get remote surgery enabled, the cost there isn’t worth it because you need to have a backup surgeon onsite. You need to have extra nurses because what if the internet goes out, right? There’s a bunch of different things that could go wrong that even if we do have the bandwidth, I don’t think the use case is there right now. Even if the use case was there, it could only be done in the most expensive hospitals and institutions with the really nice set-ups in the developed world.
Luke: I buy that.
Adu, that was a really great breakdown. You’ve given me pause for thought on my emotional attachment to the company. I absolutely think you’re right about their trajectory in terms of growth, but I still love this company and you haven’t put me off being a happy shareholder.
Adu: I think you’ve done great so far and I do think you’ll continue to do well. You’re not going to get the eye-popping returns in the last 17 years going forward.
Albert: Luke’s stubbornness is one of his competitive advantages.
More about Adu
Luke: So maybe bringing it back to Adu’s newsletter. What do you have planned for that in the future?
Adu: Currently, the plan is once a month, I’ll do a deep dive into a different medical device company. And the reason I do these is, basically… I’ll give you an example here, is with the Intuitive Surgical piece, I’m looking into a different company called Stereotaxis and they also sell robotic surgery systems. And looking so deeply into Intuitive Surgical has really helped me have a framework for evaluating new companies. And as somebody who really likes the healthcare space, medical devices space, doing a different deep dive every month, learning about a new company is interesting. It allows me to learn about different companies. It allows me to apply that, make a big picture assessment of healthcare as a whole.
I think it was the most recent podcast, Dan McMurtry on the Value Hive Podcast, he said the best thing to do for any introductory analyst is just to take one industry, start with the biggest names and then work your way down and understand each layer of it. And that’s really what I’m attempting to do with that once-a-month deep dive into a healthcare company. Other than that, also once a month, the newsletter has a new idea or an update on an old idea that I’ve previously written about or I hold in my portfolio.
Albert: Well, Adu, we know you don’t have Intuitive Surgical and while we can’t give personal financial advice on the podcast, what is your personal highest conviction holding right now?
Adu: It’s a company called Performant Financial. It’s a turnaround where they previously serviced student loans, and they basically, if you were delinquent, they came after you, got your student loans. But they recently started this new segment of the business that does healthcare auditing for insurance companies. Basically, make sure the healthcare claims are paid to the right person, make sure that they’re the right thing, and it’s growing 27% a year or 30% a year.
And if you strip out the legacy business, the healthcare segment is growing 30% a year and trades at, I think, less than five times sales and at maturity, those margins on the healthcare business because it’s just a tech platform that basically just goes to and automates this claim, this claim, that claim, that claim. And the EBITDA margin should be in the 30% range the way I estimate it. And if you tell me 30% growth with 30% margins at maturity, it should be worth more than five times sales. That’s my favourite opportunity right now.
Albert: I haven’t heard of that company I do and I just looked it up. I see that it went up 7% last night and its market cap is now $300 million, which is pretty small. Luke, this could be a possible hypergrowth stock.
Luke: I know nothing about them but I’m not sure about the ethics of that business. Adu, if that company’s legacy business is chasing your fellow students for their delinquent loans, you could be pretty unpopular.
Adu: Yeah, that’s the thing. They’re selling off that type of business for the new healthcare business. So it’s good to see them getting into a much more lucrative, better suited to my population business. If you looking for a write-up on it, I do have one of my Substack if you want to check that out.
Luke: We will check it out and, actually, you’ve got two dedicated readers here now. I took a look at your TransMedics article. Probably not a stock for me but another great piece of insight.
Adu: Yeah, TransMedics is completely different than Intuitive. I think that it could return 40% over the next five years or it could return zero. It’s very high-risk high-reward because the valuation is so demanding, but they do have such a great product that it might turn out great.
Albert: Adu, I became a subscriber of your Substack after reading the Intuitive article. I’m looking forward to reading more of your analyses.
Adu: Thank you. Thank you very much.
Luke: We definitely added you to our collection of insightful names alongside FinTwit greats like Muji at Hhhypergrowth. Trying to find these smart guys who really focus deep on a particular sector is a great way to get an advantage.
Adu: That’s actually who I modeled my deep dives after, Muji at Hhhypergrowth. I was looking for somebody who wrote about the healthcare space who just did deep dives on companies. And I looked and I looked and I couldn’t find anybody that just did deep dives taking into account the nuances of the healthcare space, being able to put a financial model to the qualitative aspects of companies. And I looked around and there was nobody there, and I thought, well, I guess maybe there’s somebody else who’s like me, who wants to read this so I started writing it.
Luke: Adu, If you build it, they will come.
Adu: Exactly. That’s the hope.
Where to find Adu
Luke: Well, great chat today. Really good catching up with you.
Adu: Yep, thanks for having me on. It’s been a great hour here.
Luke: If people want to hear a bit more from you, where might they find you on the internet?
Adu: Sure. The best place to find me is on Twitter @AduSubramanian, and I’m sure they’ll link it below because Subramanian is a little difficult to spell.
Luke: And we’ll drop a link to your Substack too and particularly that great Intuitive article.
Adu: Yep, that’d be great. Thank you.
Luke: So, Adu, any parting advice for our listeners?
Adu: As somebody who’s young, I’d advise anybody who’s listening to get started as early as possible. And I think that’s a great opportunity not just to compound your wealth, but to make mistakes because if I make mistakes when I’m this young, I have the rest of my life to make it up.
Luke: And that comes with a bit of a risk warning, right?
Adu: Don’t listen to Wall Street Bets, that’s not good advice. The advice is invest responsibly regardless of how old you are.
Albert: So we don’t recommend buying an Ether Rock then?
Adu: No, I don’t recommend that. NFTs is not necessarily my area of expertise.
Quote
Luke: Alb, why don’t you round us out with an investing quote to close the episode?
Albert: Yeah, I found an interesting one from Peter Ferdinand Drucker, an Austrian-American management consultant, educator, and author, and he was often described as the founder of modern management. Unfortunately, he passed away in 2005, but he reached the grand old age of 95 though so he had a long life. And he said, “If you want something new, you have to stop doing something old.” And he was probably talking about management, but the same thing could be said for almost every endeavour, for example, surgery.
Luke: Absolutely. You could apply that to any of the megatrends that we follow, but I particularly like it for Intuitive Surgical, this innovative company changing the world. If we all want to live longer, healthier lives, we need to start doing things differently.
Wrap
Albert: Well, that’s all for this week. Thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed this episode, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: Thanks, Albert.
Albert: Thanks, Luke, and thank you, Adu.
Adu: Thanks, guys.
