Intuitive Surgical, maker of the da Vinci robotic surgical system, has released excellent third-quarter numbers.
For those who think robotic surgery is cutting-edge stuff, the first version of this device was actually approved by the US Food & Drug Administration (FDA) in 2000. Intuitive Surgical remains the clear market leader in the sector by some margin. Indeed, a quick Google search or via the AI chatbot of your choice shows that these machines are not the domain of developed-world markets alone.
Groote Schuur and Tygerberg public hospitals in Cape Town have one each, and the University of Pretoria has a dedicated programme for training surgeons in robotic surgery. All the major private hospital groups have these machines at selected facilities nationwide. As the saying goes, the future is now.
The third quarter was well ahead of expectations. But the company has been in a state of flux over the past 12 to 24 months due to several factors, causing a series of minor headaches for management.
The first was the explosion in weight-loss drugs, which led to a commensurate drop in the need for bariatric surgery among patients with obesity, a key procedure performed with the da Vinci machine. The company is still feeling the effect of this, but as time passes the impact is becoming less severe as the FDA approves new procedures for the machine.
Second, the upgrade to the latest version, the da Vinci 5, initially fell below expectations, especially in key markets such as the UK and Japan. The UK in particular is in a challenging financial situation, with chancellor of the exchequer Rachel Reeves expected to deliver an austerity-focused budget at the end of November.
Finally, the Trump tariff wars have affected supply chains and customer upgrade and ordering profiles, especially from China, another key market for the company. However, all three of these impacts are moderating with a trade deal — or at least a framework — in place between the US and China, and a decent pickup in customer upgrades to the latest model of the machine in the past two quarters.
The reduction in bariatric surgeries is here to stay, but its overall impact on results will continue to wane. Thus, the outlook for the next 12 to 24 months looks more promising. By incorporating AI enhancements into the software on its machines, the company believes effectiveness can be materially enhanced.
Dollar weakness is providing South African investors with a more favourable exchange rate at which to add a quality rand hedge counter to their portfolio
The perennial problem with Intuitive Surgical is that it seems wildly expensive, like JSE counters Capitec and Clicks. Indeed, over the past 10 years its earnings multiple has never dropped below the low 30s and has been as high as 90, with the long-term average at about 62. That’s a racy multiple, no matter how you look at it.
Some context as to why the company attracts such a premium multiple: first, it was the first mover in this space and remains the global leader in terms of the technology and market share. With more than 25 years of surgical history, its proven track record provides a significant moat for competitors to cross. The business has also grown its earnings by more than 420% in the past decade, equating to a compounded rate of about 18%, an attractive track record by any yardstick.
Because of its dominant market share it operates on high margins, with gross profit margins in the mid- to high-60% range, translating into an operating margin of about 30%. The company sits with about $8bn in cash and no debt on its balance sheet. All of this combined signals why the stock trades at such a high earnings multiple.
So, why is IM picking it now? Operating margins have dropped below the 30% level over the past two years owing to the issues highlighted previously, but in the past few quarters it has been heading back to prior levels. Thus, the direction of travel for operating margins looks positive.
Second, dollar weakness is providing South African investors with a more favourable exchange rate at which to add a quality rand hedge counter to their portfolio. Much better to be buying at R17/$1 than R19/$1, and if there is more dollar weakness, even better.
The impact of AI across many industries and businesses is still in its nascent stage. AI should be a net positive for Intuitive Surgical, enabling it to develop more advanced machines in the future.
Finally, there is no comparable health-care sector stock even remotely close to this business available on the JSE. So, with no local alternative, it offers a chance to add real diversification to a portfolio.
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