Intuitive Surgical is the world leader in robotic minimally invasive surgery. In this investment deep dive video, I’ll unlock a comprehensive understanding of what makes $ISRG tick, and how it’s shaping a better future through technology and innovation.
My goal is to empower you with the insights needed to decide if Intuitive Surgical is right for your portfolio.
Stay tuned over the coming months as I highlight many of the extraordinary companies in my own portfolio. These aren’t just incredible investment opportunities; they’re catalysts for positive change in the world. I’ll reveal why they made my list, and provide you with in-depth analysis — all for free.
Segments:
00:00 Introduction
00:44 Agenda
01:33 Intuitive Surgical at a Glance
04:08 How Intuitive Surgical is Creating a Better Tomorrow
05:39 “Robots and Blades” Business Model
06:47 Competitive Edge
08:42 Tesla Driving Miles
11:29 Financials – Income Statement
12:57 Financials – Balance Sheet
14:23 Financials – Cash Flow Statement
15:08 Valuation
16:13 Investment Conclusion
19:55 Closing
Intuitive Surgical deep dive – Sep 2024
[00:00:00] Introduction
Speaker: Hi, I’m Luke Hallard, and today we’re diving into Intuitive Surgical, a company that’s a pioneer in the field of robotic assisted minimally invasive surgery. Why do you want to stick around for this video? Because we’re not just talking about the company, we’re going to unlock a comprehensive understanding of exactly what makes intuitive surgical tick and how it’s shaping a better future for all of us through technology and innovation.
My goal today is to equip you with the knowledge to assess why intuitive surgical might be the right thing for you. investment for your portfolio. So you’re ready to dive in and learn what makes Intuitive Surgical a potential healthcare game changer. Let’s get started.
[00:00:44] Agenda
Speaker: Here’s what we’re going to talk about today.
I’m going to give you a rundown on what the company actually does. We’ll talk about how they’re creating a better tomorrow. Then we’re going to talk about their Robots and Blades business model.
We’re going to explore their competitive edge, which is really material for this company, and then we’re going to look at their equivalent of Tesla driving miles. I think this is really interesting pointer at the potential future of the company. Of course, we’re going to explore the financials in some detail.
We’re going to go through their cash flow statement, the balance sheet and the income statement, and I’ll pull out some key numbers for investors to be aware of. And then we’ll touch on the valuation and we’ll wrap up with an investment conclusion where I’ll give you my five point investment thesis and also the five key risks.
Let’s go.
[00:01:33] Intuitive Surgical at a Glance
Speaker: Who are Intuitive Surgical? Well, the company was founded in 1995 and they received FDA clearance for the first surgical robot in the year 2000. They manufacture and market the Da Vinci Surgical System. You can see some pictures here. It’s an advanced robotic platform for surgeons to help them perform complex surgeries through tiny incisions with enhanced vision, precision and control.
www. intuitive. com They’ve delivered over 15 million successful procedures now, and in June this year, the most recent quarterly results, they told us that they’ve have nearly 10, 000 systems in hospitals globally. Now, nearly 9, 000 of those 10, 000 are the DAVINCI Surgical System, which you can see in the middle of the page.
But they’ve also recently launched their Single Port Surgical System and also the ION Endoluminal System, which is for minimally invasive lung biopsies. You can see a picture of the DAVINCI 5 here on the right hand side. This is their very latest platform, the fifth generation of their. And this has got a whole bunch of improvements that are really quite exciting
One of the most interesting additions to DAVINCI 5 is force feedback.
And in trials, surgeons, as they can actually feel the patient through the hardware, are delivering up to 43 percent less force on tissue, because they can essentially feel the push and pull forces of the instrument tip. And that’s leading to better patient outcomes. Also, DaVinci 5 is more ergonomic. It feels better for the surgeon to use.
It’s more relaxing for them to sit and control robot, and it’s reducing procedure time. Plus for investors, DaVinci 5 is 30 percent more expensive than the prior generation, and hospitals are happy to pay. I’ve actually had a conversation with a surgeon who is a user of Da Vinci 5. And they’re really excited about the force feedback, but also the fact that the tower, one part of the Da Vinci 5 setup, can be used standalone for other kinds of laparoscopic procedures.
And that could simplify a hospital’s setup in the operating theater
plus, if the surgeon wants a second opinion from a colleague during a procedure, they can send a link to a partner who can pull up a direct feed from da Vinci 5 and actually give feedback and communicate with the surgeon during the procedure.
This is really exciting innovation.
[00:04:08] How Intuitive Surgical is Creating a Better Tomorrow
Speaker: How is intuitive surgical creating a better tomorrow? Well, we talked just now about laparoscopic surgery, which has been around for decades. And this is where surgeons make a small keyhole surgery incision, and then they insert instruments and a camera and they perform surgery.
And that’s great for patients because there’s less trauma and complications also faster recovery times. But robotic surgery goes one step further as well, it gives a surgeon more degrees of freedom and precision compared to standard laparoscopic instruments
the robotic arms mimic the surgeon’s movements with a greater range of motion and dexterity, and that can eliminate the minor hand tremors that even the most experienced surgeon can experience.
The intuitive surgical robot gives the surgeon a three dimensional high definition view compared to the 2D view they have in traditional laparoscopy, and that can enhance precision during surgery. Plus the surgeon’s operating in a seated position at a console rather than standing and manually manipulating instruments.
So that can lead to faster surgeries and also less fatigue for the surgeon. Plus, simulated training. Everything is recorded with DaVinci and it allows the surgeon to play back. their procedure and explore it and understand it in more detail. that allows hospitals to run simulations and specialized training programs, improving skills and safety for all surgeons using the platform.
[00:05:39] “Robots and Blades” Business Model
Speaker: I mentioned their Robots and Blades business model. You’ve heard of the Razor and Blades business model, where companies like Gillette have sold The razor almost cost price and then they make their money on the blades.
Same with printers and ink. Well, it’s the same with Intuitive Surgical. When they sell one of their robotic surgery platforms, they make a huge amount of their revenue actually from the consumables, the actual instruments that have to be reused for every couple of surgeries that are performed. To give you a sense of the scale of this, over 1, 600 systems were placed.
Last year, 2023, and over 2 million procedures were performed using DaVinci. Well, that led to revenue in the last quarter of over 2 billion, up 14 percent year over year. And 83 percent of those revenues were were recurring from sales of instruments and accessories for the procedures, also for service contracts and also operational leases, because some customers, some hospitals lease rather than buying their robotic surgery platforms.
[00:06:47] Competitive Edge
Speaker: Let’s talk about Intuitive Surgical’s competitive edge, because they have a really significant lead over competition, and it’s really hard for competition to catch up. For one, they’ve been in this market for nearly 30 years, and they’re now on the fifth generation of hardware, so they’ve learned a ton over that period.
They’ve indeed performed over 15 million procedures since inception. This is also a highly regulated industry and intuitive have regulatory clearances in over 70 countries, which enables broad adoption globally. And that’s going to be really hard for competitors to replicate quickly in such a highly regulated industry as healthcare.
There’s a massive installed base, and that gives intuitive surgical scale and an entrenched customer base, because hospitals have made a significant capital investment in the platform, and they’re unlikely to change. Plus they’re unlikely to change because they have such a huge number of trained surgeons. Over 66, 000 surgeons now trained worldwide, which creates a lot of stickiness in the user base.
Plus training is needed ongoing as new procedures and techniques are developed. And so the company has over 49, 000 hours of virtual reality training that were logged by surgeons just last year. Of course, the company has a very strong patent and an intellectual property portfolio, over 4, 000 patents granted and several thousand more pending, which protects their innovations from being copied.
Plus they’re maintaining their significant lead over competition. by investing significant numbers in R& D, nearly a billion dollars annually in research and development just last year. And that’s going to help the company maintain its lead, make them very hard to catch. Plus they just have a very strong brand, really well known globally as the leading robotic surgery platform.
[00:08:42] Tesla Driving Miles
Speaker: now let’s relate how Intuitive Surgical are operating to Tesla. Tesla have been running autonomous vehicles for years now, and they’ve clocked up over 100 billion driving miles. So that’s a hundred billion miles of real video from all the cars that are out there on the road, plus how the drivers are operating those cars, and when they’re turning off autopilot to take control manually.
Tesla are learning a lot, and that’s feeding into training for their latest versions of full self driving. Well, I think this is actually very similar to the way intuitive surgical operating. The company has collated a vast repository of real world and real time data, collected from over 2 million procedures that they do annually now.
And that’s not just the video, that’s how the instruments are moving and how they’re tackling each individual case. Well, Intuitive Surgical now have a product they call Case Insights, which they term as a computational observer.
Essentially, this is AI looking at that huge quantity of procedure data from real surgeries and then trying to pull out insights. It helps individual surgeons study their own procedures, but also AI and big data techniques are allowing the company to identify correlations between surgical technique. patient populations, and the surgical outcome. Basically, what kind of techniques work best? What kind of techniques potentially lead to complications for the patient? And this massive data is certainly going to reduce surgeon training times. It will help hospitals improve efficiency, reduce costs.
Certainly, I would expect it to improve clinical outcomes for patients,
but also, interestingly, It could lead us towards a future where some elements of surgery are fully automated, perhaps with a single surgeon overseeing multiple procedures taking place in parallel. A bit like full self driving with Tesla, where the driver only steps in when there’s a problem. Potentially a da Vinci robot.
One day. Don’t forget this is a highly regulated industry. This will be a long, long time away, but maybe the robot could start to do some elements of the surgery itself, with the surgeon acting in an oversight rather than operating mode. Even before we get there though, there are still opportunities for the robot to provide coaching and feedback, potentially to a surgeon, in the middle of a procedure, perhaps warning them, If you’re about to make this incision, then in.
Some percentage of cases in the past that’s led to complications. Are you sure you want to do that? I think this is quite an exciting innovation for surgery that’s going to help us all live longer, healthier lives.
[00:11:29] Financials – Income Statement
Speaker: Let’s turn to the financials. And what I want to do here is drill into the real numbers from the income statement, the balance sheet and the cashflow statement. And I’ll pull out some headlines for investors. Of course, revenue growth is one of the most important factors for any business. And Intuitive Surgical is now reaching more of a mature mode where revenue is growing at about 14. 5 percent annually, but the last quarter revenue was 2 billion. And as you can see on the bottom left, that was mostly US, but 35 percent of those revenues are non US . So there’s still lots of opportunity for them to grow internationally. The company’s operating at a 68 percent gross margin, and that gross margin has expanded year over year, and they’re also delivering a 26 percent net income margin, which is also expanding.
So this is just showing the maturity of the platform and how they’re gaining operational leverage as they mature. It’s nice to see minimal shareholder dilution. I can’t say that for every stock in my portfolio,
but shares were just up by 4 million in the last year, so that’s nothing to worry about. In the most recent earnings, the company also provided forecasts of full year procedure growth of 15. 5 to 17 percent year over year. So that’s broadly consistent with the most recent quarter, which was 17 percent procedure growth.
So no real red flags on the income statement at all.
[00:12:57] Financials – Balance Sheet
Speaker: Let’s take a look at the balance sheet, and we do have a bit of a red flag here. The company is incredibly well capitalized, nearly five billion dollars in cash and equivalents, and a current ratio of over five. That basically means they have a ton of cash and not very much debt.
They’re well capitalized. But inventory has been increasing. Now I dug into what was really happening with the inventory story because that could be a red flag. But interestingly, we can see also in another part of the most recent 10Q that raw materials, work in progress, and finished goods all increased proportionally.
You can see that at the bottom of the slide. So that more hints that the company is scaling up production either to support the growth of the future business or build resilience future supply chain problems. So I don’t think that’s a red flag. But we should also note the Days Inventory Outstanding have also increased now to 192 days, and that’s up 26 percent year over year.
So inventory is still something for investors to monitor going forwards. We’d really want to see the Days Inventory Outstanding stabilizing or coming back down to more normal levels of 120 to 130 days. The company hasn’t made any big acquisitions recent years, and so there’s de minimis levels of goodwill on the balance sheet, which is typically quite a nice thing to see.
[00:14:23] Financials – Cash Flow Statement
Speaker: Let’s have a look at the cash flow statement. Not a huge amount to look at here. Stock based compensation is pretty low, less than 9 percent of revenue, and relatively stable. So, again, not a red flag. Plus, we can also see that line for purchase of property, plant, and equipment of just over 550 million in the last six months.
So overall, there’s a story here of CAPEX increasing. When you dig into the earnings call, it’s revealed that the company’s investing in improving its manufacturing and commercial capabilities, and they’re planning a 1. 2 billion investment in full year 2024. So that’s a lot of spend. But it’s spend focus in the right way to prepare the company for the future.
[00:15:08] Valuation
Speaker: Let’s have a look at the valuation. This makes me wince, unfortunately. The market cap today is around 158 billion dollars, which is 70 times forward free cash flow, and 80 times earnings.
Now, if we look at a near competitor, that’s a company called Medtronic, who also have a robotic surgery platform called Hugo. Well, they have 101 billion market cap, but only 17. 6 times free cashflow. So Intuitive Surgical is materially more expensive than Medtronic, and that is something to be aware of. And if we use forward free cash flow of just over 2 billion and a 10 percent discount rate, Intuitive Surgical’s valuation today demands 26 percent free cash flow growth over the next 10 years. Now, let’s bear in mind, revenue is only growing about 15 percent annually, so we’re unlikely to see that growth in free cash flow, which means there is significant valuation risk.
This is an expensive stock.
[00:16:13] Investment Conclusion
Speaker: now let’s wrap it all up by looking at the investment conclusion and the key risks. The thesis, intuitive surgical are the market leader with a multifaceted competitive edge. Over 15 million procedures performed using DaVinci to date. Regulatory clearances in over 70 countries.
Over 9, 000 systems installed worldwide, 66, 000 trained surgeons, over 4, 000 patents, and a billion dollars invested annually into R& D to maintain that leadership. They’ve also got their Robots and Blades business model, with 83 percent of revenues recurring, so really steady cash flows and financial stability for investors.
Procedure growth is improving and the platform is becoming a preferred choice among US general surgeons for procedures like hernia repair and surgical removal of gallbladder. And DaVinci 5 is opening up additional procedures as well. Plus, don’t forget, 5 sells for 30 percent more than prior generation.
The company has a fortress balance sheet and really strong financials, 4. 7 billion in cash and short term investments, and a current ratio of over 5, so very little debt. Plus, we’ve got those Tesla driving miles. That vast quantity of procedure data enables the company to use AI techniques to improve patient outcomes, and potentially one day in the very far future, perhaps automate some elements of robotic surgery.
But of course, A ton of risks. Chief amongst them is valuation. This is an expensive stock, and the valuation will take a hit if procedure growth stalls, or if investment sentiment weakens. Competition coming. Medtronic Hugo is a close competitor, and it’s also cheaper to invest. But then when has cost ever really been a major factor in U.
S. healthcare at least? But not just Medtronic, we also need to be aware as investors about the many alternative systems that are now operating in China, and they might be able to scale more rapidly than intuitive because it’s just a less stringent regulatory regime there for healthcare.
The company has seen the rise in Bariatrics. Procedure growth slowing because of drug based treatments for obesity. Drugs like Ozempic and Wegovy. And this may not be the last time we see a drug based therapy potentially disrupting the need for surgical intervention. So that could impact the company in the future.
Plus it’s a tough macro environment. Interest rates look like they’re going to be coming down this month, but consumer spending is tight and money is expensive. so this could limit elective healthcare spending by individuals, but also it could pose a credit risk to the company if hospitals that are leasing systems are adversely affected.
Plus of course, healthcare is just a highly regulated environment, and so there’s always the risk that a company like Intuitive Surgical or any of its competitors may fail to comply with new or evolving regulations, and that could be painful. We’re going to see an update next in October 2024 when the company reports its Q3 results.
And the two metrics that I generally track for this company are procedure growth and also the volume of deployed systems. Because together those two numbers drive recurring revenues. Don’t forget that Robots and Blades business model. And it’s recurring revenues that are really the juicy part of the story here for investors.
[00:19:55] Wrapping Up
Speaker: Okay, let’s wrap it all up. I hope you enjoyed my deep dive on Intuitive Surgical. You’ll be able to find the full slides on my Twitter. You can find me at 7LukeHallard. And if you’ve got questions about today’s content or there’s something more you’d like to know, I’d love to hear your questions. Tell me what you’re curious about.
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