Excerpt Copied from Seeking Alpha
Intuitive Surgical: The Growth Story That Wasn't
Saturday, April 12, 2:19 AM ET | Bill Maurer
"Suraj Kalia commented, "We ask a fundamental question....What is the da Vinci Xi really trying to solve other than be a "jazz" factor? From a purely engineering perspective, we do not see how the da Vinci Xi is radically different from the Si (we are specifically talking about cost and clinical effectiveness). While some of the features in terms of instrument set-ups and multiquadrant capability in the Xi is good, it does not address the fundamental issues hospitals are facing which is lack of cost-effectiveness. We believe we are entering a cycle wherein Intuitive will have to start offering discounts in order to maintain growth. Either top-line growth gets sacrificed or margins get squeezed ... Field checks on the Firefly continue to be poor, and we cannot figure out the emphasis from Intuitive on this imaging modality."
The second half of that statement is what worries me. Either Intuitive will have to sacrifice top line growth or margins will get squeezed. Neither scenario is very appetizing, especially when you have such a lofty valuation. Obviously, some investors might take this in stride since the firm has a $275 target on ISRG. I don't see Intuitive falling that much anytime soon, but it goes to the issue of the growth story. Intuitive is having a hard time with device sales, and the company has blamed insurance companies and the ACA in recent quarters. Add in some of the legal troubles, and you can see why the company's growth has stalled a bit.
Final thoughts / preferred trade:
Another warning from Intuitive Surgical sent shares lower. A recent spike in the stock has mostly been eliminated, despite a new da Vinci system coming online. This company has hit a rough patch in terms of its growth story, and at a premium valuation, the stock is just too expensive. Going forward, the company may need to sacrifice profits to resume revenue growth. Earnings per share will be helped a little by the buyback, but it won't be enough to offset a sharp decline.
For now, investors should consider Intuitive a short candidate until the growth picture clears up or the stock gets a bit cheaper. An outright short is not a bad idea, but I think hedging this position (via options) a little is the best way to go, just in case. At this point, the market has been beaten down the past few days. I would wait until the next bounce back to short Intuitive, as you might see a bounce to $450 or so at some point. For investors that want to be in right away, maybe short half now and short another half if shares pop.
In the end, Intuitive has had a rocky couple of weeks. A sharp rise has been followed by a fall, and that fall might continue as estimates trickle down. Intuitive is going to have some explaining to do on the call (April 22nd), and growth questions will be asked. As you can see from the chart below, Intuitive was below $420 before the recent run started, and that could be the next pullback level to watch if this name heads lower. Should these revenue and earnings issues continue into Q2 and further, you might see shares fall back into the $350 to $400 range or even lower. A company that trades at such a high valuation needs growth, and right now, Intuitive is severely lacking in that department."
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