Today we have a moderately speculative idea.: take shares in surgical robot maker Intuitive Surgical (NASDAQ: ISRG) in anticipation of a rebound in these stocks after the recent fall.
Growth potential and validity: 13,5% behind 14 Months; 37,5% behind 3 of the year; 10% per annum during 20 years.
Why stocks can go up: because they recently fell.
How do we act: we take shares now for 267,50 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
ISRG manufactures automated surgery systems. Simply put, surgical robots, which help the doctor to perform operations.
According to the company's annual report, its revenue is divided as follows:
- Goods - 83%. These are the surgical systems of the company, which bring 26,66% proceeds, as well as spare parts for them such as blades - this 56,34% proceeds. Segment gross margin — 55% from its proceeds.
- Services - 17%. This is the maintenance and adjustment of the company's equipment. Segment gross margin — 11% from its proceeds.
Geographically, revenue is divided as follows: 68% — USA, 32% - other countries.
Arguments in favor of the company
Fell down. The company's shares have fallen sharply over the past month and a half.: from 364 to 264,12 $. To some extent, this was influenced by the publication of the latest report: results were better than expected, but investors were scared by the information about the decrease in the number of procedures in the last quarter. Although I think, that the fundamental attractiveness of the company's business will be stronger and we will be able to capitalize on the rebound.
Promising. We published the idea for this company in 2019, and she showed a very good result. The basic prerequisites are the same: the need for labor automation in the medical field is no less acute, than in production. But we are not talking about a complete replacement of human labor, and about its addition and, respectively, squeezing more efficiency out of personnel actions.
The arguments in favor of surgical robots are very strong: operations are significantly more efficient and safer with them, than without them. Wherein, while robots are used only in 15% surgical operations, we can hope for a significant increase in ISRG sales, for it is expected, that this market over the next eight years will grow at a rate ranging from 9,5 to 19,3% in year.
So I would expect the company's financial indicators to continue to grow simply because of the excellent market conditions - even if there are slight disruptions in the activity of doctors, which will temporarily reduce the load on ISRG equipment.
But in the medium term, growth in sales will be helped by a growing shortage of staff in US hospitals.. Surgical robots are one of many ways to squeeze more out of existing staff., unloading it from unnecessary work so much, as far as it's possible. Although, certainly, postponing surgical procedures will neutralize this plus.
There are beneficiaries besides us. One can also hope for the growth of the company's quotes due to the influx of large institutional investors into its shares. Maybe, they will come in anticipation of further growth of her business.
Bank and fund managers read the same studies, as we, and therefore appreciate, what a sci-fi idea ISRG has turned into a working and successful business with a high final margin.
They can also expect the company to introduce dividends at least at the level 3 $ per year in the foreseeable future - this will give a little more 1% per annum, but a small profitability here in the eyes of large investors will be compensated by a stable and confident growth of the main financial indicators, as well as the overall reliability of the company's business.
And large investors will probably decide to take advantage of the current drawdown, to take shares of the company cheaper.
What can get in the way
Expensive. Company P / It's about 58, a P / S about 17,53. Already this is a lot. At the same time, ISRG, with its capitalization of $95 billion, is more expensive than its market by almost 14 once, and on it it occupies a share the size of almost 79%. So stocks can be very volatile..
A pandemic. Pandemic negatively impacts business: Due to quarantines, people are postponing surgical procedures. For example, in 2020 the company shipped 936 systems, which is significantly less than 2019 — 1119 system. New strains and restrictions could easily ruin a company's reporting over the next few quarters..
no fools. The huge capitalization of the company does not give us the opportunity to hope, that its shares will be pumped up by a crowd of retail investors.
Played "Monopoly". ISRG has actually taken over the entire market, but it is fraught with danger. The company's robots cost a lot of money - from 500 thousand to 2 million dollars. At the same time, she earns even more money by selling tools.. This creates a fan of unpleasant possibilities for the ISRG..
Firstly, doctors will kick. Some medical organizations are already suing ISRG due to the high cost of spare parts, accusing her of monopoly and imposing the sale of tools and spare parts at inflated prices. To reduce the cost of spare parts for the company will mean a deterioration in its financial result.
Now opposition to the company is already ripening among medical organizations., associated with its price tag. If the situation gets out of hand, then many hospitals may well organize to refuse to buy the company's equipment in order to force it to make concessions. For for all the evidence of the benefits of robots, they will be able to find evidence that, that even without robots it works fine.
As they say, "truth is in the eyes of the writer of the study". There is not only evidence of the highest efficiency of surgical robots, but also an alternative point of view, seems to be backed up by scientific research, – that robots are not particularly superior to human surgeons. Not even that important, how true is this: this is the line of defense that hospitals will use in the event of a mass failure.
It will be even worse for the company, if she loses in antitrust lawsuits: then it will definitely have to simplify the terms of contracts in favor of customers and reduce the price tag - with clear consequences for quotes.
It is also very possible, that doctors will use as a bargaining tool as real, and fictional stories about, how ISRG equipment put patients' lives at risk, which can have a very noticeable effect on ISRG quotes.
Secondly, competitors will compete. Profitability of surgical robots proven by ISRG example. This will stimulate the inflow of venture capital into this area., which over time will surely lead to the emergence of cheaper competitors ISRG. This would mean at best, that the ISRG will have to spend a lot of money to buy out these startups or competitor divisions. And this will burden her accounting.
In the worst case, the robots of other companies will begin to push the ISRG out of hospitals, well there are other problems. I do not think, that the company this year will pass the bitter bowl of logistical problems and rising costs of industrial raw materials: this is now the scourge of all, without exception, businesses with a large share of production operations. Although it is worth noting, that until recently, the company very worthily experienced all these misfortunes.
What's the bottom line?
We take shares now by 267,50 $, then there are three options:
- wait 300 $. Think, we will reach this level in the next 14 Months;
- hold shares for the next three years in anticipation of, that they will return to the level 363 $. It's not the smartest plan.: the company is not cheap, but objectively acts as a leader in the advanced, promising industry, which is already making a lot of money.;
- keep shares next 20 years and together with the company to see, how robots will take over hospitals.
