You might have thought that Intuitive Surgical (NASDAQ: ISRG) would have a hard time beating its performance in 2017. After all, the maker of robotic surgical systems reported record revenue. Its stock soared nearly 73%.
But Intuitive Surgical is actually on track to achieve an even better performance in 2018 than it did last year. The company should post revenue of at least $3.6 billion -- 16% higher year over year. So far, the stock is up 58% with three months remaining in the year.
Is Intuitive Surgical's momentum unstoppable?
There's nothing about Intuitive's business that indicates that its momentum will slow down anytime soon. The number of procedures performed using its da Vinci robotic surgical systems continues to grow by solid double-digit percentages. The same is true for new system placements. Combine those two factors and you have a recipe for sustained revenue growth.
Intuitive Surgical generated 71% of total revenue last year from recurring sources such as sales of instruments, accessories, and services. That figure is likely to grow even more in the future, providing the company a greater amount of reliable recurring revenue.
But one of the biggest reasons Intuitive's momentum could continue is the potential for robotic surgery. More than 20 million invasive surgeries are performed in the U.S. alone each year. Some of these surgeries have relatively high complication rates. In particular, variability among surgeons is a big issue: Intuitive cites studies that found the bottom quartile of surgeons had three times more complications than the top quartile of surgeons. Robotic surgery offers a way to conduct minimally invasive surgery and reduce this variability.
Another major factor that should sustain Intuitive Surgical's momentum is definitely unstoppable -- aging populations. The long-term trend of more elderly individuals works to the company's benefit. Older adults require surgery more often than younger adults do. These aging demographics don't apply only to the U.S. Countries in Asia and Europe are also seeing the numbers of elderly individuals dramatically increase.
Intuitive is also investing in research and development to expand how robotic surgery can be used. The company launched 80 new products between the middle of 2015 and 2018. It currently awaits FDA clearance for yet another new product to obtain lung biopsies. Intuitive's focus on innovation could even accelerate its momentum.
Disrupting the disruptor?
Intuitive Surgical has a large install base. The need is great. The technology is improving. The long-term demographic trends work in the company's favor. Is there anything that could slow Intuitive's momentum? Actually, yes.
In the world of physics, an object's momentum will continue unless a force gets in the way. The same principle applies for business and investing. And there are several "forces" that could get in Intuitive Surgical's way.
The biggest potential obstacle is Medtronic (NYSE: MDT). Although Medtronic delayed its launch of a robotic surgical system expected to compete head to head against Intuitive's da Vinci system, the new system should launch sometime in 2019. If Medtronic decides to heavily undercut Intuitive on price, it could change the dynamics in the robotic surgical systems market.
Medtronic recently announced that it was acquiring Mazor Robotics, a leader in surgical robot systems for spine surgery. Mazor's technology doesn't compete directly against Intuitive Surgical. However, it could work to Medtronic's advantage to dominate in surgery niches in which Intuitive doesn't currently have an offering while also rolling out a new system that does go head to head with da Vinci.
While Intuitive Surgical faces a bigger challenger with Medtronic, it could have to fend off attacks from a smaller rival as well. TransEnterix is just getting started with its Senhance robotic surgical system, which offers several features that da Vinci doesn't.
Then there's the potential future competition for Intuitive from Verb Surgical, which is a company formed by Google parent Alphabet and Johnson & Johnson. Verb doesn't have a product on the market yet. But it's possible that within a few years, Intuitive Surgical, the innovative company that has disrupted the surgery market, could find its own technology disrupted.
The most likely threat
Could Intuitive Surgical lose momentum because of new competitive threats? Perhaps. My view, though, is that the global robotic surgical systems market will grow quickly enough that there will be multiple winners -- definitely including Intuitive.
I suspect that the most likely threat that could derail Intuitive's momentum is an economic downturn. The current economic expansion and bull market are getting very long in the tooth. Intuitive stock fell around 70% during the Great Recession of 2008 and 2009. It would likely take a lesser but still significant hit in the wake of a milder recession.
However, economic downturns are temporary. Intuitive Surgical bounced back pretty quickly during the last major pullback. The positive factors for Intuitive aren't temporary in nature. Intuitive Surgical's momentum just might be unstoppable over the long term.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Intuitive Surgical. The Motley Fool owns shares of Johnson & Johnson and Medtronic and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool recommends Mazor Robotics. The Motley Fool has a disclosure policy.