Prediction: This Could Be The Largest Healthcare Stock By 2042
Over the past 20 years, the medical device giant Intuitive surgery (ISRG 2.19%) significantly outperformed the market. While the company’s shares are currently struggling in part due to coronavirus headwinds, there are still great reasons to be optimistic about its future. In fact, within the next two decades, Intuitive Surgical has a chance to become the largest healthcare stock. Let me explain.
A quick overview of the landscape
Currently, the two largest healthcare companies are the pharmaceutical giant Johnson & Johnson, with a market cap of $433 billion, and insurance specialist UnitedHealth Group, which has a market capitalization of $475 billion. The list includes other pharmaceutical companies such as Eli Lily to $295 billion and Pfizer at $247 billion. Intuitive Surgical looks relatively small compared to these giants, with a market capitalization of “only” $66 billion.
But comparing the performance of all these healthcare stocks over the past two decades is instructive. For good measure, let’s add the S&P500 and the Healthcare Select Sector SPDRan industry benchmark.
Even given its recent setback, Intuitive Surgical has easily outperformed these other companies (and indices) over the past 20 years. Of course, past performance is not necessarily an indication of what will happen in the future.
But here’s the point. If Intuitive Surgical can achieve a similar performance against its peers in the future, it has a chance to become the biggest company in the industry within 20 years. And there are good reasons why the medical device specialist can accomplish this feat.
The exciting future of Intuitive Surgical
Intuitive Surgical’s prospects are intimately linked to the growth of the robot-assisted surgery (RAS) market. He is the leader in this industry, having developed the first RAS device to be cleared by the United States Food and Drug Administration (FDA), the da Vinci Surgical System, in the year 2000. Intuitive Surgical’s performance in the past largely reflect the progress it has made in this space.
The business can continue to grow provided the demand continues to grow in the RAS sector. Investors shouldn’t have to worry about that. In 2021, only 3% of surgeries were performed robotically. RAS allows doctors to perform minimally invasive surgeries, which greatly benefits patients. Compared to traditional open procedures, minimally invasive procedures result in less bleeding, less scarring, faster recovery, and shorter hospital stays.
Just because this market is ripe for growth does not mean that Intuitive Surgical will be the sole or even the main beneficiary. This type of potential can only attract fierce competition and the business can only survive if it manages to gain a competitive advantage. Fortunately, this is something Intuitive Surgical has already done.
The company’s moat comes from several sources. First, there is the value of intangible assets like patents that protect its products and give it some pricing power. Intuitive Surgical held over 4,200 patents in the United States and abroad as of December 31, 2021. Second, the da Vinci system comes with high switching costs. The RAS device costs between $0.5 million and $2.5 million.
Training medical staff to use the machine takes time. Healthcare organizations will not want to lose this investment by switching to a competing platform unless absolutely necessary. In the second quarter, Intuitive Surgical had an installed base of 7,135, representing a 13% year-over-year increase. Most of these customers are likely to stay put.
Intuitive Surgical has competitors in this area, including Johnson & Johnson and Medtronic. Both companies have some catching up to do: Intuitive Surgical held almost 80% market share in 2020. Will they eat away at Intuitive Surgical’s leadership in the years to come? My opinion is that they will. But the market opportunity is more than large enough to accommodate multiple winners.
It should also be noted that the industry has high barriers to entry. Building a surgical robot is the first step, and it’s hard enough. Testing it and getting clearance from health industry authorities can take a lot of time and money. Medtronic has not yet obtained clearance for its Hugo system in the United States, although it has been tested and approved in other countries.
This speaks to the difficulty of entering this space, and it bodes well for Intuitive Surgical, which has already passed through all these regulatory hoops.
An excellent choice nonetheless
A lot can happen in 20 years. Intuitive Surgical may encounter unforeseen issues during this time. Even if not, my prediction might not come true. Either way, the medical device specialist has the tools a company needs to be successful in the long run. That’s why buying shares of Intuitive Surgical today and holding them for a while would be a smart move.
Prosper Junior Bakiny holds positions at Intuitive Surgical and Johnson & Johnson. The Motley Fool fills positions and recommends Intuitive Surgical. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.