Intuitive Surgical (NASDAQ: ISRG) makes the da Vinci surgical robot system. The company’s products, including the parts and services that support its robots, have been in high demand for years. Wall Street has noticed, bidding the growth stock up and leaving it with a lofty price-to-earnings ratio of 64. Keep that valuation in mind as you consider this sleeper stock just beginning to enter the U.S. market with its Hugo surgical robotic system.
The reason to look at Intuitive Surgical here is that it has installed over 11,100 da Vinci robots worldwide. But the sale of the robots is just the start, since roughly 75% of the company’s revenue is derived from services and the sale of instruments and accessories. That’s recurring revenue that creates an annuity-like income stream for this medical device maker.
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While Intuitive Surgical was a first mover in the surgical robotics space, the healthcare industry is competitive and innovative. There is room for more than one player in most market segments, including surgical robotics. This is why you will probably want to take a look at Medtronic (NYSE: MDT), which has just received FDA approval for its Hugo surgical robot in the United States. The first surgeries in the U.S. market using the system were performed in February.
Medtronic has a P/E of 27. That’s not low on an absolute level, but it is far lower than the P/E being afforded to Intuitive Surgical. If the Hugo system experiences the same kind of growth as the da Vinci system, Wall Street is likely to take notice and boost Medtronic’s valuation.
Still, there are some differences here. For starters, Medtronic is a much more diverse business, with large, established divisions across cardiovascular, neuroscience, and surgical markets. That diversification will likely limit the growth opportunity to some degree. Moreover, the company has been in a product development phase for several years, with few exciting new products being introduced. Hugo could change that, but at this point, investors appear to be in a show-me mood. Buying now could get you in before the surge.
One thing that Medtronic offers that Intuitive Surgical doesn’t is a dividend. With a yield of around 2.9% and decades of annual dividend increases backing it, dividend investors will definitely want to get to know Medtronic and dig into the story around Hugo.
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