ISRG has been a dominant leader in the robotic surgery field and has shown remarkable growth over the past several decades.
First, a review paper evaluated the short-term outcomes of colon surgery for patients with cancer across 13,000 patients.
A second analysis compared robotic-assisted and thoracoscopic anatomic lung resection in obese patients across over 8,000 patients.
While there is certainly ongoing debate about which applications are best-suited and most cost-effective for surgical robots, overall, the market outlook is highly promising.
YoY growth was outstanding in part due to the low demand during the first pandemic wave of 2020, but 2 year growth from pre-pandemic levels was also very strong.
Given the high profitability and revenue growth protected by their economic moat, ISRG has tremendous ability to generate cash and maintains a strong balance sheet.
The company plans significant infrastructure investments to build capacity and in source some high-volume accessories to make the supply chain more robust.
However, recently the stock price has recently fallen off significantly to reach its lowest level in the past 6 months.
For the bullish and very bullish case, I assumed EBITDA growth of 35% and 45%, respectively, for the next 5 years and zero growth afterwards.
Some premium is certainly justified, given the company’s high profitability, dominance within a high growth market, historical track record of growth, and recent launch of a new Ion system to complement the wide-selling da Vinci system.
However, the high competition will prevent ISRG from capturing the full share of market growth and the company’s growth is likely to taper going forward.
The supply chain should improve over time, and the company is also investing in infrastructure which will enable them to manufacture some high-volume accessories in-house.
I expect their market share to erode over time, and the rapid growth in the overall market for robotic surgeries will not be enough for them to maintain the +35% levels of growth necessary to justify their current valuation.
Disclosure: I/we have a beneficial long position in the shares of ISRG either through stock ownership, options, or other derivatives.