An Intuitive Surgical Short

It appears that there is a “short” circuit within the well-known surgical robotic system manufacture Intuitive Surgical Inc. (ISRG).

It appears that there is a “short” circuit within the well-known surgical robotic system manufacture Intuitive Surgical Inc. (ISRG). The Sunnyvale, Calif.-based company is responsible for the design, manufacturing and marketing of da Vinci surgical systems, and associated accessories. ISRG is also recognized for its EndoWrist instruments that include surgical tools that build off of the company’s “hand like” movement systems enabling surgeons to operate in complicated procedural environments through singular incisions. 

ISRG has also diversified its offerings to include endoscopes and other surgical items to work with its robotic assisted system. ISRG’s main product line retails at about $1.5 million per unit, and is intended to create briefer hospitalization stays, less intrusion and less pain. It is a primary marketer and distributor of its products but works with secondary resellers in the United States, Europe and Asia. 

The company’s seemingly perfect free cash flow and its record double digit earnings of more than 35 times suggest a robotic force primed for 2017. Its market cap of $24 billion and a current price/earnings ratio of 
34 is signaling it may be primed to short. 

In light of any overtly perceived question of its sustainability, its third quarter earnings report shocked the street in its revelation that there was considerable slowdown within its urology unit. This timing is particularly ominous when viewed together with the election of Donald Trump and his commitment to repeal and replace the Affordable Care Act (Obamacare), in addition to the looming competition within this niche market. 

Not every hospital can afford ISRG’s price point on its main product line. And there remains uncertainty over whether the price savings it produces in terms of shorter hospital stays and fewer complications is truly balanced, as well as claims its machines offset the need for superior trained surgeons. 

While ISRG’s product’s are unique, there is mounting competition from large players who are ready to take stabs at the automated industry in the health sector. 

Specifically, the competition from Google (GOOG) and Johnson and Johnson’s (JNJ) new venture VERB, aim to continue to reduce the human factor and the reliance on human skill and increase the robotic efficiency of surgeries at a lower price point.

technical picture

ISRG rallied more than 40% in 2016 from February through September and is now in correction mode. After setting a double top at $727 in the fall, ISRG broke through both its 50-day and 200-day moving averages and is threatening a death cross as the 50-day MA appears close to crossing below the 200-day MA (see “Technicals scream sell” below) . The failure at the double top also broke the trendline from the 2016 low. 

The stock gapped lower following the U.S. election, ending an upward correction that was threatening to move back above the 50-day MA. Since topping in October, it has taken out support at $675 and $625, levels representing brief correction lows below the 50-day MA (see “Technicals scream sell” above). 

The breach of the 200-day MA also corresponded closely with the break of a long-term trendline connecting the 2015 and 2016 lows. ISRG’s technical weakness now warrants lower P/E multiples. In a market that may place more constraints on the health sector based on a new President’s aim, its technical pattern and its P/E sustainability, combined with new methods of cheaper technology and ISRG facing challenges, perhaps we will see a test of its 2016 low near at $502.