My approach to investing has a lot in common with Warren Buffett. He likes buying into companies with strong customer demand and a unique competitive advantage. That has led me to Intuitive Surgical (NASDAQ: ISRG). I have been weighing up adding Intuitive Surgical stock to my portfolio.
Here is why I think it could be a great buy for me – but why I am not purchasing just yet.
Strong market demand
The company makes and services robots that can perform certain types of surgery.
As hospital waiting times around the world show, there is clearly strong demand for surgery. I expect that to continue indefinitely and indeed grow as the population ages in many countries.
Intuitive is able to benefit from this.
Compelling competitive advantage
As a product, surgery robots offer a number of advantages to hospitals. They could offer a reduction in hospital wage bills and they should also be more consistent in what they do.
However, that means multiple firms are interested in expanding in the robotic surgery area. Indeed, in the long run I see that as possibly the biggest risk to Intuitive’s profitability. Competition could push down prices and hurt the stock price.
But I reckon the firm has a wide Buffett-style moat that gives it a sustainable competitive advantage. Its machines are costly, so once a hospital shells out on one it has an incentive to use it for a long time. Surgeons are trained on the machines and so there is a switching cost in time for them to use robots from an alternative manufacturer.
Intuitive’s huge library of past procedures has helped it refine its product efficacy. On top of that, the firm benefits from patents on many proprietary elements in its system.
Razor and blades model
As if that was not already attractive enough as a business model, there is more!
Buffett used to own shares in Gillette before it was taken over by Procter & Gamble. The company epitomises the use of a ‘razor and blades’ business strategy. That business school favourite describes selling a product cheaply and then profiting from users buying refills for years to come.
Intuitive machines are not cheap to start with. But the firm does benefit from the sale of peripherals. Every patient needs sterile equipment, meaning Intuitive can sell vast amounts of single use attachments designed specifically to fit its machines. Indeed, in its most recent quarter, revenues from selling instruments and accessories were more than double those of system sales.
On top of that, I see training as a potentially vast revenue stream. Intuitive is the largest robotic surgical trainer to be accredited by the Royal College of Surgeons of England.
My move on Intuitive Surgical stock
So am I buying? Not at the moment.
I think the firm matches Buffett’s definition of a brilliant business and would happily hold it in my portfolio for the long term.
But clearly other investors feel the same way. The stock trades on a price-to-earnings ratio of 65, which I see as very expensive, even for a great company. Like Buffett, I aim to buy great businesses selling at attractive prices. So I will continue to watch the share in future to see whether its price falls back to what I see as an appealing entry point.
