2 Reasons Intuitive Surgical, Inc. Stock Could Fall

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Intuitive Surgical (NASDAQ: ISRG) is the epitome of a disruptive innovator. The robotic surgery pioneer changed the way hundreds of thousands of surgical procedures are performed every year, likely improving countless lives in the process.

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Its technology is world-class, and its razor-and-blades business model is a thing of beauty. In 2016, more than 70% of Intuitive's revenue was of the recurring variety, derived from the sale of instruments and accessories used by the surgeons conducting operations with its robotic systems, as well as maintenance on the systems themselves. This, in turn, has led to a predictable and steadily growing stream of high-margin revenue, which Intuitive uses to fund its research and development program and further fuel its growth.

Put all this together and you have a formula for market-crushing returns. Intuitive has delivered just that, with its stock rising an incredible 5,400% since its IPO on June 23, 2000.

Yet even the best-performing businesses have risks, and it's important to study the threats that could derail your investments. That way, you can identify the key trends you should be watching so you won't be blindsided by them.

On that note, here are two reasons Intuitive Surgical's stock may be vulnerable to a fall in the coming years.

Increasing competition

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While Intuitive's smaller rivals have so far failed to gain much traction in the market, a new threat is emerging on the horizon. Verb Surgical is a robotic surgery joint venture between healthcare colossus Johnson & Johnson (NYSE: JNJ) and tech titan Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). By combining J&J's medical device expertise and Alphabet's prowess in robotics, data analytics, and connectivity, Verb Surgical could emerge as a powerful force in the world of digitally enhanced surgery. "We're going to impact millions and millions of lives," says President and CEO Scott Huennekens. "We're going to bring surgery forward."

Another medical device giant, Medtronic (NYSE: MDT), has also entered the robotic surgery race. At a market cap of nearly $110 billion, Medtronic is three times larger than Intuitive Surgical. It serves a far larger global network of hospitals, and it possesses a massive sales force, which Medtronic is using to market the Renaissance robotic surgery system as part of its agreement with Mazor Robotics (NASDAQ: MZOR). Along with an option to become the sole source for Mazor's next-generation systems, Medtronic also purchased a stake in the company. And if the partnership goes well, it's possible that Medtronic could move to acquire Mazor outright as a way to accelerate its robotic surgery ambitions.

Priced for perfection

In addition to this potential onslaught of competition, Intuitive's richly priced stock presents another major risk for investors. The robotic system maker's shares currently trade at nearly 13 times sales and more than 50 times earnings.  Even on a forward basis, Intuitive sports a P/E ratio of 41.6 based on analysts' estimates for 2017. With its earnings projected to grow at an annualized rate of only 11.3% over the next half-decade, the stock's price-to-earnings-to-growth ratio, or PEG, of almost 3.7 is well above the 1.0 that's widely considered to represent bargain territory.

Thus, if Intuitive were to disappoint investors in any way -- such as with an earnings "miss" or weaker-than-expected forward guidance -- its shares could get hit hard. And as is typically the case for premium priced stocks, any significant market pullback would likely result in an even more severe downturn in Intuitive's stock price.

Moreover, if new competition begins to slow Intuitive's sales growth or erode its margins, the premium investors have so far been willing to pay for its stock could quickly disappear. Such a situation might result in a sharp fall in Intuitive Surgical's stock price -- and sizable losses for shareholders.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Intuitive Surgical, and Johnson & Johnson. The Motley Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.