When you think of a razor and blade business model, Gillette probably springs to mind faster than Intuitive Surgical (ISRG). But ISRG has an enviable model that combines the sale of its patented Da Vinci robots and recurring revenues from each surgery performed. Plus, it has a robust moat in the form of patents to deter and slow competitive threats.
Unlike many companies with a “razor and blade” model, ISRG actually makes money from its “razor” sales, which come in the form of the Da Vinci robot. The “blades” are the consumables used in each surgery.
A good business model is just a part of the battle, though. Competition and customer adoption are threats that slow growth. Yet, as you’ll see, ISRG has the hallmarks of a company to buy and hold for the next 10 years. Here’s why.
Almost 7,000 Da Vinci Robots Worldwide
Da Vinci systems are highly complex and have a price tag to match. These are multi-million dollar machines and over 6,700 are located globally in medical facilities. The keys to the kingdom, however, are not the robots alone. The company generates even more revenue from selling instrumentation and accessories for surgeries.
The combination of “razors and blades” to ignite top line growth has been powerful. Top line growth in 2017 was 16%, corresponding to $3.1 billion in revenues. In 2018, a further 18.7% growth was reported. That was followed by 20.3% growth in 2019.
Indeed it wasn’t until the economic freight train derailed in 2020 that revenues fell flat. But by 2021, fast growth had resumed when management reported an astonishing 31% uptick in sales to $5.7 billion.
Market Size Is Expanding
Now step back in time for a moment and consider an investment that seems obvious in retrospect: Alphabet (GOOG).
For many years Alphabet was growing at a fast pace, but what wasn’t obvious to naysayers at the time is the market which the company was serving was rapidly expanding too. Alphabet created a model to monetize content… in a world where content production was exploding. The combination of successful business model and secular tailwinds from market size expansion were exponential.
So too does Intuitive Surgical have the luxury of a similar tailwind. The market size is forecasted to reach almost $13 billion within 3 years and Intuitive Surgical is expected to capture 71% of it.
Like Alphabet, Intuitive Surgical enjoys a dominant market share. Even battle-hardened Stryker, which competes with it will struggle to keep pace.
Look no further than the Alphabet vs Bing battle for an explanation.
By the time Bing came along to threaten Google’s advertising dominance, Google ads were everywhere, inserted into millions of websites globally. That creates an almost impenetrable wall to surmount for a competitor. Not only would Bing have had to attract search users and advertisers in droves, but it also had to dislodge Google.
Similarly, Stryker and competitors are faced with an uphill battle: high switching costs. Once a hospital has installed a Da Vinci system and trained surgeons on the platform, it’s highly unlikely to switch to a competitor.
Why ISRG Is a 10-Year Hold
Not only has Intuitive Surgical grown top line sales quickly and captured a dominant market share in a growing market, it has sustained a near 70% gross margin, and is growing EBIT even faster. Operating income rose from $1 billion to $1.8 billion from 2020 to 2021.
The company has a ton of cash and no long-term debt to speak of also, which further supports the argument that it is a business well-capitalized to expand domestically and internationally.
Some tides are not worth fighting. For the patient investor, the returns should be handsome. This is a stock to keep on an active watchlist to buy on dips.