3 Reasons Intuitive Surgical, Inc. Stock Could Rise

By Brian Feroldi Markets Fool.com

Investors in robotic surgery pioneer Intuitive Surgical (NASDAQ: ISRG)had a nice 2016. The company's stock rose by more than 15% during the year, which was a strong enough performance to outpace both the S&P 500 and theiShares U.S. Medical Devices ETF (NYSEMKT: IHI).

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ISRG data by YCharts.

One downside to the bullish move is that Intuitive's price-to-earnings ratio has been pushed above 35. That's a premium valuation that could cause many investors to stay on the sidelines. However, there are reasons to believe that shares could still rise from today's lofty levels. Here's a look at three of them.

1. da Vinci sales remain on the upswing

While more than 70% of Intuitive's revenue comes from disposable instruments and services, sales of the company's da Vinci surgical systems themselves are still a major component of revenue. More importantly, customers who buy a da Vinci system today will be forced to buy the company's high-margin disposable instruments and services down the road. That's why it is still incredibly important for Intuitive to continue to grow total systems sales.

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Image source: Intuitive Surgical.

Intuitive recently gave investors a preliminary look at its fourth-quarter performance, and the results were encouraging. Intuitive said it sold 163 systems during the period, which brings its total sales up to537 systems for all of 2016. That figure represents a healthy 9% gain over the prior year and brings thecompany's worldwide install base to 3,919. As long as Intuitive can keep this number heading in the right direction, its shares will likely respond in kind.

2. Intuitive to address internationalweakness

While total system sales volume trended higher in 2016, the company did see a few pockets of weakness. Most notable was the 12% decline in system placements in Europe.

Management is acutely aware of this disappointing result and is focused on addressing the problem. Here's what Intuitive CEO Gary Guthart had to say about the company's weak European performance at the 2017 J.P. Morgan healthcare conference:

There are some places that we underperformed our hope. Most of them were in a couple of countries in Europe. And that had more to do with making sure we have the right clinical data and the right connections into the payer community. We're working on those things. In general, I think they are solvable problems.

In an effort to reverse the drop, the company is investing in local clinical studies that will generate country-specificclinical and economic data. The hope is that this information willhelp localsurgeons and payers learn about the financial and clinical benefits of performing surgery robotically. If the company can show that performing surgery with a da Vinci system is a cost-effective alternative to traditional surgery, then restrictions will likely ease, and sales will rise.

3. New products on the horizon

Image source: Intuitive Surgical investor presentation.

While there is still plenty of room left for growth within the company's current product portfolio, Intuitive continues to look for new ways to move surgery forward. One of the more exciting developments is an additional patient-side cart (the actual robotic component of the system) that could be used in conjunction with the company'sXi platform. This product is called "Sp," which stands for "single port," and it is being studied for used in transoral and transanal surgery.

If the company can bring this product to market, then it could be used in a range of applications. For example, this device promises to give surgeons a detailed look at the inside of a patient's throat, rectum, or lungs. That could make it far easier forthem to diagnose diseases like lung or throat cancer at an earlier stage than current technology allows. In turn, patients could start treatment before the disease progresses, which could increase survival rates.

While this device is still in development, the company has alreadyinitiated human clinical trials and confirmatory clinical studies. That hints that it could be sent off for regulatory review in the not-too-distant future.

While it has already produced stellar long-term returns for investors, Intuitiveremains well-positioned for more growth ahead. If the company can execute its growth strategy, then shareholders would likely see further gains from here.

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Brian Feroldi owns shares of Intuitive Surgical.Like this article? Follow him onTwitter where he goes by the handle@BrianFeroldior connect with him on LinkedIn to see more articles like this.

The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.