Better Buy: Intuitive Surgical, Inc. vs. Medtronic plc

Keith Speights, The Motley Fool

Updated Sun, Apr 1, 2018, 7:33 AM

Intuitive Surgical (NASDAQ: ISRG) has, without question, been the far superior stock for investors in the past than Medtronic (NYSE: MDT) has. Whether you look at the last year, three years, five years, or longer, Intuitive Surgical has been the stock to own -- not Medtronic. Sure, there have been some stretches where Medtronic performed better, but those were the exceptions.

None of that matters for investors choosing between these two stocks now, though. What does matter is which stock has the best growth opportunities going forward. Is Intuitive Surgical still a better buy? Or does Medtronic have an advantage in the years to come? Here are the strongest arguments for buying each of these stocks.

Physician holding palm out with robotic surgery graphic in foreground

Image source: Getty Images.

The case for Intuitive Surgical

Nothing has really changed with the investing thesis for Intuitive Surgical. The reasons to buy the stock now are pretty much the same as they were a few years ago.

Demand for robotic surgery has grown tremendously. Between 2012 and 2017, the number of procedures performed using Intuitive Surgical's da Vinci robotic surgical system more than doubled. This growth is likely to continue. Demographic trends should drive volumes higher for the types of surgeries best suited for robotic assistance, with older males needing prostatectomies and middle-aged women requiring hysterectomies.

Intuitive Surgical isn't limiting itself to the primary types of procedures that have made da Vinci so successful, though. The company is investing in development of more sophisticated equipment that will enable even more types of surgeries to be performed using da Vinci.

While Intuitive Surgical opens the door to new types of procedures, the company also has a significant opportunity for growth by opening more doors across the world. Nearly 65% of da Vinci systems are installed in the U.S., but there are many more hospitals and patients in the rest of the world than in the U.S.

Investors should also love Intuitive Surgical's "razor-and-blades" business model more now than ever. In 2017, 72% of the company's total revenue was from recurring sources, primarily sales of instruments and accessories. Five years ago, recurring revenue generated 63% of total revenue. Growth from new systems sales will push recurring revenue even higher in the coming years.

Even though Intuitive Surgical faces new competition, the company's first-mover advantage shouldn't be underestimated. Thousands of customers use da Vinci every day. They're comfortable with the product. Intuitive Surgical also has years of data to support the safety of its system. Newcomers to the robotic surgical industry don't have the same track record, and could find winning customers in a head-to-head match-up with Intuitive quite difficult.

The case for Medtronic

Medtronic offers something that Intuitive Surgical doesn't: a dividend. And Medtronic isn't just any old dividend stock. It's a member of the elite group known as Dividend Aristocrats. Medtronic has increased its dividend for 40 years.

There's also something to be said for Medtronic's scope of operations. The company has four business segments that market different types of medical devices, generating billions of dollars each year in sales. Unlike Intuitive Surgical, Medtronic isn't dependent on just one core product for its success.

The same demographic trends that bode well for Intuitive Surgical should also benefit Medtronic. As the numbers of older adults across the world increase, demand for Medtronic's pacemakers, heart valves, stroke therapies, diabetes management systems, and other products should grow.

One area of growth that especially excites investors is Medtronic's entrance into the robotic surgical systems market. Medtronic partnered with Mazor Robotics (NASDAQ: MZOR) a couple of years ago to distribute Mazor's robotic surgical systems that focus on spine and brain surgery. Medtronic owns a stake in Mazor and now has worldwide distribution rights to the Mazor X surgical robot system.

But the alliance with Mazor was just the start. Medtronic plans to launch its own robotic surgical system that will directly compete against da Vinci. The timeline has slipped for this launch, with software/hardware integration and testing taking longer than expected. Still, Medtronic could be a force to be reckoned with in the near future.

Better buy

Which of these stocks is the better buy? It depends on what type of investor you are. Income-seeking investors definitely should choose Medtronic. But if you don't need steady income from dividends, I think Intuitive Surgical is the better pick.

I fully expect Medtronic to gain some market share in the robotic surgical systems market with its own forthcoming product and Mazor's system. However, I think that demand will increase enough to support multiple players. I also believe that Intuitive Surgical will hang on to its leadership position and keep up its solid momentum, thanks to the company's big head start and continue innovation.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool owns shares of Medtronic. The Motley Fool recommends Mazor Robotics. The Motley Fool has a disclosure policy.

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