While recent headlines focused on Apple (AAPL) stock breaking through the magic $500 barrier on Monday, I'd like to turn your attention to another Silicon Valley-based tech stock that penetrated the same magic level -- and on that very same day: Intuitive Surgical (ISRG)
This name became familiar to momentum players in 2011. Still, I found it surprising that the stock has actually outperformed Apple over the past six months -- although Apple has pulled ahead on a shorter-term time frame.
Back at the peak of the dot-com boom in 1999, the field of surgical robotics was little more than a medical curiosity. Today, Intuitive Surgical designs, manufactures, and markets robotic surgical systems under the da Vinci brand that translate the surgeon's natural hand movements into corresponding micro-movements of instruments positioned inside the patient through small puncture incisions. Scarcely a decade out of the technological starting gate, da Vinci is now applied to a wide range of surgical procedures in hospitals in the U.S., including urologic, gynecologic, cardiothoracic, general and head-and-neck surgeries.
Although Intuitive is already a company with $20 billion dollar market capitalization, it still boasts small-cap-like growth numbers. On Jan. 19, the company reported a profit of $3.75 a share, up 24.2% from the year-earlier quarter and well above Thomson Reuters' consensus analyst estimate of $3.35. Sales rose 28% to $497 million vs. consensus of $483.7 million.
The full 2011 results also beat expectations. Revenue climbed 24% to $1.76 billion, compared with the $1.74 billion forecast. Profits hit $12.32 a share, topping expectations of $11.90.
Yet, many investors remain skeptical of Intuitive's recent run. Here's why.
First, the company expects only 2% to 3% of annual revenue growth in system placements this year, down substantially from the approximate 20% growth in 2011. Although that's only a portion of Intuitive's revenue, it does signal a slowdown. Management still forecasts 17%-to-19% total revenue growth this year. However, that's lower than the 24% last year. At the same time, operating income should grow at 39% to 40% of sales, as it has in the last couple of years.
The second reason for skepticism is that Intuitive stock is not cheap. While it happens to trade at the same share price as Apple does, its price-to-earnings ratio of 41.5x is almost triple that of Apple's 14.5x. If the market valued Apple at the same P/E as it did Intuitive, Apple would be a $1,450 stock. Further, given that Apple's top and bottom lines are growing even faster than are those of Intuitive, you can argue that Apple should trade even higher.
So what explains the difference in valuation? I believe it's the fact that Intuitive benefits from a tremendous "moat."
Unlike Apple, Intuitive has no major direct competitors. In addition, there are significant barriers to entry into Intuitive's market. Any new competitor to the da Vinci system would have to completely retrain hospital staff already familiar with Intuitive's system -- and that's not very likely to happen. As a result, the bet is that Intuitive will continue to be successful in expanding the roster of robotic surgical procedures and the number of hospitals in which it will become available in the U.S. and abroad.
That's very different from Apple's situation, as the company operates partially in the same space as does Nokia (NOK) and Research In Motion (RIMM) -- two former tech highflyers that today both have smaller market caps than Intuitive does today.
So is Intuitive a bargain? No, it isn't. But its strong market position means that unlike, say, the Blackberry, it'll be around for while.
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