Believe it or not, 2016 is about to make way for a new year. Intuitive Surgical (NASDAQ: ISRG) shareholders have plenty of reasons to be happy with the way this year has turned out. Will next year be just as good or better for the surgical systems maker? Here are three predictions for Intuitive Surgical in 2017.
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1. Recurring revenue will rule even more
Probably the safest prediction of all for Intuitive Surgical is that recurring revenue will become even more important in the year ahead. In 2013, recurring revenue made up 63% of total revenue for the company. In the first nine months of this year, recurring revenue comprised 71% of total revenue.
Intuitive Surgical typically enters into service contracts with every new system sold. These contracts usually bring in between $80,000 and $170,000 annually per agreement. Most customers renew the service contracts when they expire. This is usually the best financial move for them, since instruments and accessories used with Intuitive's da Vinci surgical systems wear out over time.
As a result, Intuitive Surgical enjoys a compounding effect when it comes to recurring revenue. I expect the company to rake in well over $2 billion in recurring revenue in 2017.
2. Political impact will be mixed
Practically speaking, Intuitive Surgical probably won't feel any real impact in 2017 from the agenda of President-elect Trump and the incoming Congress. That's because it will take a while for parts of the agenda to pass and even longer for any changes to take effect. However, some of the political changes could affect Intuitive Surgical's stock even before they actually impact the company's business.
A repeal of the Affordable Care Act, commonly known as Obamacare, could hurt hospitals that have benefited from more Americans covered by health insurance. With 72% of its revenue coming from U.S. hospitals, Intuitive Surgical might also suffer from the demise of the health reform legislation. Of course, the true impact will depend on what replaces Obamacare. It's possible that the negative repercussions from a potential repeal of the law won't be too bad for Intuitive Surgical.
On the positive side, the prospects for corporate tax reduction could be a big boon for Intuitive Surgical. President-elect Trump promises to cut corporate taxes from 35% to 15%. In 2015, Intuitive Surgical paid $169.7 million in income taxes. A reduction in its U.S. corporate income tax rate would mean the company could keep millions of extra dollars. While any tax changes passed next year wouldn't take effect in 2017, the promise of more money in the future should help Intuitive's stock.
3. Competition won't be a big problem (yet)
Intuitive Surgical has been able to have the robotic surgical systems market largelyto itself. That near-monopoly won't last forever, though.
Mazor Robotics (NASDAQ: MZOR) has made some headway in the spine surgery market, receiving orders for 25 of its Mazor X systems in the third quarter of 2016. Fifteen of those orders came fromMedtronic (NYSE: MDT), which signed a strategic agreement in May with Mazor. Medtronic also bought a stake in the small robotic surgical systems maker.
Medtronic is also developing its own robotic surgical system. The company expects to begin making significant revenue from the system in 2019, which means that a launch could happen in 2018.
The dark horse rival that could prove most disruptive, though, is Verb Surgical, a joint venture between Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and Johnson & Johnson (NYSE: JNJ). Gary Pruden, J&J's worldwide medical devices chairman, recently stated that the products currently on the market, including Intuitive Surgical's da Vinci system, really aren't robots. Verb Surgical's goal is to create a truly robotic surgical system using big data and anatomical-recognition software.
Despite the presence of these and other rivals, Intuitive Surgical shouldn't feel a big impact in 2017. However, that could change in the future as Mazor gains more traction, Medtronic rolls out its system, and Verb Surgical moves forward with its vision.
I like what famed physicist Niels Bohr said about predicting: "Prediction is very difficult, especially if it's about the future." Bohr was right about a lot of things, including predictions.
However, I think the three predictions for Intuitive Surgical in 2017 are pretty good bets. If they indeed come true, that should mean good news for the company's shareholders next year.
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