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Tickers in this Article: ISRG, PHG, GE, HOLX, ARAY, SI, SYK, BAX
You can follow medical technology for a long time and not find too many growth stories like Intuitive Surgical (Nasdaq:ISRG). I know because I've been following this sector for more than a decade, and there haven't been many others like this one. Here you have a rare combination of incredible growth, virtually no competition and a clear clinical benefit to the product.

And yet, the stock is down almost 50% from its 52-week high. Not only is the valuation quite high (even granting that it's a top performer), but skeptics are just waiting for the signs that the growth story is going to crack. So, given that we're in the middle of a nasty market correction and the company didn't report an absolutely 100% spotless report, I'm not all that surprised to see the stock trade off following earnings.

Dissecting the Earnings Report Selloff
Once again, Intuitive Surgical delivered the goods with its earnings report. Revenue jumped more than 50%, with systems revenue up 48% on a 44% increase in system placements. Margins improved a little, and that led to a 57% jump in operating income.

Looking further, instrument and accessory revenue was up more than 53% for the quarter, and represented about one-third of the company's revenue base. I suspect that part of what prompted a selloff in the stock was the recognition that utilization rates were up on an annual basis, but down a little sequentially. That does not surprise me, nor does it necessarily mean anything about the future (the third quarter, the one that includes the summer months, often shows a sequential slowdown in surgical procedures across the industry), but it's not the news a nervous market wants to hear. (Learn to do your own analysis, in our Financial Statements Tutorial.)

The Worries About The Future
Thinking about Intuitive Surgical's future, I have two main concerns - one for the short-term and one for the longer haul. In the short term, I'm worried about the health of capital budgets at U.S. hospitals. Many hospitals generate a large percentage, sometimes virtually 100%, of their capital budgets from charitable giving, and recessions (and the accompanying decline in the net worth of the wealthy) aren't easy on charitable giving. What's more, elective surgeries also kick in some welcome profitability and budget flexibility and those too dry up when times get tougher.

Now, I have no qualms about the value and merit of the Intuitive Surgical's daVinci systems. I frankly think they're on their way to being a standard of care. But there's only so much a hospital administrator can do to stretch the budget, and sales reps from Philips (NYSE:PHG), General Electric (NYSE:GE), Hologic (Nasdaq:HOLX) and Accuray (Nasdaq:ARAY) are still out there pitching their must-have equipment too.

My bigger concern has to do with whether Intuitive Surgical can continue to manage its growth. There are some unique challenges to managing a successful, growing med-tech company with over $800 million in cash on the balance sheet. It's also just a simple fact that you don't see many medical technology companies in the $4 billion to $10 billion market cap range. Most growing med-techs with real products get picked off by larger players looking to buy growth. Frankly, I see this as Intuitive's most likely fate. I don't know if the acquirer will be a large medical player like GE or Siemens (NYSE:SI), a medical equipment leader like Stryker (NYSE:SYK) or a player completely out of left-field like Baxter (NYSE:BAX) - but I just think Intuitive is eventually going to get an offer it can't refuse. (For added insight, check out Trademarks Of A Takeover Target.)

Parting Thoughts
Intuitive Surgical management has the challenge of managing its growth and effectively shepherding the growth of shareholder value. That's no mean feat, but I think management is up to the challenge. I still happen to believe that there will be another chance to get these shares cheaper as investors worry about hospital budgets and ordering trends, but if that happens I'll be looking to take advantage of the situation.

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