Intuitive Surgical reported mixed results in the first quarter, even though the revenue growth and earnings came in ahead of our expectations. While analysts believe the company’s moat is still among the widest in the space (and the quarter doesn’t do anything to challenge this thesis), analysts believe investors are overestimating the growth potential of the company as the value of robotic surgery is coming under greater scrutiny.
Systems sales came in ahead of our expectations, at 24% growth. Though this was a moderate surprise (aided by the unsustainable average sales price boost), analysts caution that the near-term strength hides the inevitable–system placements will decelerate over the next few years, potentially even drastically, as fewer greenfield sales and higher utilization of already installed platforms reduce the need for additional robots. Greenfield numbers have been on a steady decline (although this quarter saw somewhat of a trend reversal, likely due to the Japanese launch of the Si model), and while one could argue that a sale is a sale no matter where it goes, relying on repeat customers for system placements exposes the firm to replacement cycles. With utilization rates still very low, there’s a strong chance that the firm may become a victim of its own success.
The firm delivered excellent results on the bottom line, and accelerated its buyback program. analysts agree there are not many reinvestment opportunities out there and approve of the decision to avoid throwing capital at acquisitions. But given the inflated stock price relative to our fair value estimate, Analysts don’t view this buyback as a value accretive move, rather management’s somewhat of a reactionary move to the recent negative publicity. Analysts would note though that while litigation is certainly a headline risk for the company, we don’t view it as a threat to the firm’s long-term opportunities.
The key worrisome dynamic, in our opinion, is the somewhat predictable slowdown in the firm’s bread-and-butter procedures, dVP and dVH. The dVP’s 11% decline was to be expected (and the deceleration of the decline is a welcome sign), but benign hysterectomy came in below the firm’s internal expectations. We’ve taken a cautious approach in our modeling of benign hysterectomy even before the latest JAMA study questioning its cost effectiveness, and it is clear that the negative publicity surrounding da Vinci’s lack of value over laparoscopic hysterectomies has taken its toll on the growth. We’ve also cautioned regarding the overreliance on cholecystectomy to offset dVP and dVH declines. Cholecystectomy’s rapid growth masked the weakness in gynecology and urology, and we maintain our stance that much of this procedure volume may be disappearing.
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