Updated on May 14th, 2022 by Felix Martinez
Advances in technology have been enormous in recent years, to say the least. That is certainly true in medicine as well, with innovation in medications as well as equipment driving better outcomes for patients, and profits for the companies that innovate more quickly than competitors.
One such company is Intuitive Surgical (ISRG), a medical device maker that has seen its stock soar nearly 900% in the past ten years. It is a large-cap stock with a market capitalization now at a very impressive $75 billion after another strong run in 2021. However, the stock has pulled back 38% so far this year.
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Intuitive Surgical’s profit base is quite significant and growing. But for income-focused investors, Intuitive Surgical may not be the right choice.
After all, the company has never paid a dividend. However, as it matures in its growth cycle and generates excess cash, the company has the potential for a dividend raise. In this article, we’ll examine Intuitive Surgical’s business, growth potential, and whether it might ever pay a dividend.
Intuitive Surgical was founded in 1995, and in just 25 years, has gone from a startup with essentially no revenue to a giant in the field of medical devices. The company designs, manufacture, and markets its da Vinci surgical systems and related accessories and instruments, primarily in the U.S.
The da Vinci machine is an all-in-one solution for performing a variety of surgical procedures as the surgeon is aided by technology, rather than relying upon a human to perform the surgery alone. Da Vinci’s applications are numerous, including gynecology, urology, cardiothoracic, head and neck procedures, and more. The uptake in da Vinci has been extraordinary over the years, and this single product has turned Intuitive Surgical into the global leader in medical devices that it is today.
The da Vinci machines performed more than 1,500,00 billion procedures worldwide last year. The company expects a 15% growth in procedures for its de Vinci machines for 2022. However, the company’s installed base of nearly seven thousand machines, as well as its ever-growing customer list mean that the backlog for postponed surgeries is robust.
Intuitive is on pace for $6 billion in revenue this year, which would be up from $5.7 billion in 2021.
Despite its large size, Intuitive Surgical has an immense amount of growth potential in front of it. The installed base of da Vinci machines has grown at double-digit rates for years, including an 18% gain in 2021. In addition, the number of procedures the machine can do is expanding, meaning that customers are finding greater utility in the machine.
This has led to more procedures per machine, as well as existing customers purchasing additional machines.
Source: Investor presentation
Da Vinci machines cost between $0.5 million and $2.5 million to purchase, depending upon configuration, which generated about $1.6 billion in total revenue last year. Those are one-time purchases for the customer, but it opens the door to significant recurring revenue for Intuitive Surgical as the machine is used in procedures subsequent to purchase.
The lucrative recurring revenue is what is helping to drive Intuitive Surgical’s growth, as a higher installed base of machines means a higher level of recurring revenue, which comes from servicing revenue, as well as accessories and peripherals that are used up during a procedure. Indeed, recurring revenue was 26% in 2021, which is extremely attractive from an investor’s perspective.
Source: Investor presentation
Intuitive Surgical isn’t resting on its laurels, however. The company continues to use the cash it generates to invest in future growth, including improving its core da Vinci system, but also in creating new products that serve related needs.
Above is just a sampling of the growth initiatives the company is working on, and while none of these is likely to ever reach anything like the success of da Vinci, diversifying away from a core product is always a good idea. We believe that Intuitive Surgical’s growth runway in the coming years is enormous, and project revenue growth in the low-double-digits annually, with earnings-per-share growth closer to 15%.
The company’s most recent earnings report showed growth compared to prior quarters. Worldwide da Vinci procedures rose 19% year-over-year, reflecting what the company called recovery from COVID-19. The compound annual growth rate between the first quarter of 2019 and the first quarter of 2022 was approximately 15%.
It also shipped 311 da Vinci systems, an increase of 15% from the 275 systems it shipped in the same period a year ago. However, the installed base grew 13% year-over-year to 6,920 systems as of the end of the quarter.
Revenue was $1,487.7 million, an increase of 15.1% year-over-year, driven by more new system placements in 1Q2022.
Instruments and accessories revenue was up 14.7% year-over-year to $810 million, which was driven by the growth in procedure volume. Systems revenue was up 16.1% to $249.3 million, attributable to more new machines being shipped.
Net income came to $369.4 million, or $1.13 per share on an adjusted basis, down from $435.2 million and $1.17 per share in the same period a year ago. Intuitive Surgical lower its cash position by a further $217.7 million in Q1, and it now stands at $8.4 billion.
Intuitive Surgical’s competitive advantage is obvious in that it is the only company in the world that makes a machine that is as versatile and well-accepted among medical practitioners as da Vinci. Its unparalleled growth in the past two decades is a testament to its durable advantage.
Source: Investor presentation
The company is still heavily reliant upon the US for its revenue, but as the above picture shows, Intuitive Surgical has been busy expanding globally as well.
With a huge market opportunity for thousands of new da Vinci placements in the developed and developing markets of the world, we see this advantage as durable for the long term. There simply is not a viable competitor to da Vinci at this point.
Will Intuitive Surgical Ever Pay a Dividend?
Given all of this good news about the company’s prospects and indeed its current position of strength, will it ever return cash to shareholders via dividends? Intuitive Surgical certainly has the ability to do so, which can’t always be said regarding growth stocks. It has a cash position of more than $8.4 billion and generates hundreds of millions of dollars of additional cash each quarter.
Intuitive Surgical, however, has been investing that cash to fund future growth, as it has since its founding 25 years ago. The company makes small acquisitions to buy technology it can scale for future growth, and it has been buying back a relatively small amount of stock, mostly to offset dilution from employee stock awards.
We believe the company will continue this practice for the foreseeable future, meaning it is very unlikely to pay a dividend soon. However, given that the company is obviously generating much more cash than it needs to invest in the business, we believe the potential is there for Intuitive Surgical to pay a dividend.
We think this is likely many years away. But once the installed da Vinci base reaches maturity, and barring a massive strategic shift, we believe the company will have much more cash than it can profitably invest, and may therefore consider paying a dividend.
Intuitive Surgical has been one of the best medical equipment stocks to own for years. The company’s growth has been enormous, and shareholders have reaped the rewards. However, income investors would have no reason to own the stock given it has never paid a dividend.
While we don’t think that will change soon, we do believe the company will reach a point where it generates more cash than it can invest in the business. The company has proven it will return cash to shareholders via share repurchases, so a dividend isn’t a big stretch from there.
With a durable competitive advantage, a very long runway for growth, and strong free cash flow generation, we believe we will see Intuitive Surgical mature in the years ahead, and potentially begin paying a dividend to shareholders.
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