Global medical device market leader, what makes Da Vinci surgical robot so powerful?

The U.S. stock market is currently adjusting at a high level, still some distance away from breaking through the index. However, new high-growth companies are emerging one after another. While AI stocks are temporarily struggling, many blue-chip stocks that have not seen significant cumulative gains in the past few years are reaching new highs with a slight boost from positive financial reports. Inadvertently, the leading positions in some industries have already changed. Looking at the medical sector, the shadow of the post-pandemic era still lingers, making it difficult for the sector's overall index to reach the peak of 2021. However, new leaders have emerged in both the pharmaceutical and medical equipment sectors. Lilly has replaced Pfizer as the market leader, with a market value three times that of Pfizer, despite still catching up in terms of revenue and profits. In the field of medical equipment, Medtronic has been replaced by Da Vinci Surgical Robots, which generate only one-third of the revenue. The huge prospects for weight loss and diabetes miracle drugs are also evident. However, the market value of Da Vinci Surgical Robots surpassing many medical equipment giants such as Medtronic, Stryker, and Boston Scientific has gone unnoticed. How did the medical equipment sector also undergo such a transformation? Are surgical robots riding the wave of AI + humanoid robots, or are real huge prospects about to be unleashed?

I. Unimpressive Performance From a performance perspective, Da Vinci Surgical Robots are far from perfect. Looking at the latest quarterly performance disclosed, revenue growth is around 14%, with a sequential growth rate of 5%, which is not considered high growth in the U.S. stock market. In terms of profit, the gross profit margin is still around 70%, with a profit margin still not reaching the highest level of 30% in 2021, currently at 26%. The profit for a single quarter is 530 million, which is significantly lower compared to the market value of 170 billion. Although the profit growth rate is better than revenue, reaching 20%, this is still not a surprising figure. In terms of performance guidance, the growth rate of surgical guidance is similar to the first half of the year, with no surprises. The only bright spot may be the smooth landing of the new product Da Vinci 5, with a significant increase in orders, but this has not had much impact on performance. The company also mentioned that the gross profit margin for this quarter was temporarily boosted, and it is still difficult for the long-term gross profit margin to exceed 70%. Surgical robots are still highly precise hardware involving complex manufacturing processes, and this type of hardware cannot achieve the large-scale cost reduction through mass production like pharmaceuticals, making it difficult for this industry to achieve a gross profit margin as high as 80%+ Da Vinci's financial data is far behind that of pharmaceutical giants like Novo Nordisk and Eli Lilly. Both of these companies have seen fierce stock price increases as well as strong revenue growth. In terms of valuation, Da Vinci is much more outrageous than them, with a PS ratio of 22 times and a PE ratio of 90 times, and there are no other fluctuating factors affecting its performance. It can be said that the market has very high expectations for this company, so high that it is difficult to understand. With such high pricing, it is also hard not to associate the logic with Tesla. Apart from self-driving technology, Tesla also has the concept of humanoid robots to maintain its sky-high valuation. After AI can understand language commands, it can combine with hardware in the industrial field to reshape productivity, further improve automation efficiency. If Tesla represents the industrial direction, then Da Vinci represents the medical direction. However, from the current perspective of product application, Da Vinci's current product form is not really related to automated robots. Its operation is still based on the actions of doctors, just mapping the actions of doctors to robotic arms to improve accuracy, reduce doctor fatigue, increase efficiency, and enhance surgical quality. It is impossible to operate the machine without a doctor or without a treatment instruction driving the machine. The Da Vinci robotic system currently looks more like a tractor to farmers, a car to the era, and a computer to engineers. Calling it a robotic arm is more appropriate than calling it a robot, and the business model is similar to these products. Today, the application of AI in large models does not have much significance for the current operating mode of the Da Vinci robot. Obviously, the current performance or the AI trend is still difficult to explain the valuation of the company. Second, a good business model + vision Looking at the data, the undervaluation of the leading companies in the medical device field has reasons. Just comparing net profit margins, you can see a slight difference, and the growth rate is not impressive. Compared to them, Da Vinci Robotics stands out. The leading companies mentioned above, such as Medtronic, Boston Scientific, and Stryker, currently have less than ideal net profit margins. They are not the same type of company as Da Vinci. These companies cover almost all areas of medical devices and consumables, with a wide range of product lines from cardiovascular to neurological to surgical robots to diabetes consumables. You can find the presence of Medtronic, Boston Scientific, or their brands in almost all medical devices On the one hand, having a comprehensive understanding of these companies is beneficial. However, the downside of being comprehensive is that with a large product line and dispersed research investment, it is difficult to achieve economies of scale. Generating 10 billion in revenue from 1000 products requires a high profit margin, which is obviously much more challenging than achieving 10 billion in revenue from a single flagship product. Moreover, although consumables involve a high level of technology, they are consumer goods with not particularly high usage rates. It is difficult to scale production lines, as different categories of medical devices cannot share production lines. As a result, having a large production line makes it difficult to concentrate research and development efficiency. On the contrary, companies focusing on single large products for treating specific diseases can achieve good revenue and profit margin performance. Companies like Intuitive Surgical, which only have surgical robots and their related services, or Edwards Lifesciences, which focuses solely on TAVR, can break into the top 10 in market value. They are successful under the strategy of single large products. This explains their high profit margins compared to the industry and their high valuations, which are also very reasonable.

The business model of Da Vinci Surgical Robot should be compared to that of the former Siemens Healthcare and GE Healthcare companies, whose largest revenue comes from imaging equipment, essentially supplying hospitals with the most expensive MRI and other equipment. These advanced medical imaging devices effectively address complex diagnostic tasks that cannot be completed by the naked eye. However, the market performance of these two companies is currently unsatisfactory. By comparing them with Da Vinci, several differences can be found. Firstly, medical imaging equipment has been in use in medical institutions for decades, with limited room for sales growth. In order to grow and scale, these companies have already developed product lines of multiple categories of medical devices, making their product lines relatively complex. In contrast, the application of Da Vinci Surgical Robot in many surgeries has not yet been fully implemented. Each new type of surgery validated will increase product sales. Currently, it is only used for laparoscopic surgeries such as general surgery, urology, and gynecological surgery. Orthopedic and pulmonary surgeries are still in the validation and scaling phase. Surgical robots have strong versatility, and there is still great potential for expanding applications. The company believes that there is still three times the space for robotic surgeries.

At the same time, surgical robots have become a fundamental tool for telemedicine. Many highly skilled doctors can remotely perform surgeries on patients in underdeveloped or remote areas with the help of low-latency networks and surgical robots. This is an important means of distance reduction in medical skills, with much greater potential than the application prospects of imaging diagnostic equipment. This also indicates the possibility of surgical robots becoming a high-value, highly penetrative large basic equipment in the future.

On the other hand, Da Vinci is currently dominant in the core field of laparoscopic surgical robots. The second-ranked surgical volume is almost negligible. In contrast, in the field of imaging equipment, there are Siemens, GE Healthcare, Philips, as well as Japanese companies such as Canon, Hitachi, Fuji, and other impressive competitors. The market competition is fierce, which has lowered the industry's average profit margin. Up to now, Da Vinci has not encountered any real competitors. Medtronic, GE, and Johnson & Johnson have all introduced surgical robots, but they cannot capture market share. This competitive landscape is comparable to NVIDIA's dominance in AI computing power. Currently, there are many startups in the field of surgical robots in China, with the determination to at least surpass Medtronic, but they lack scale and funding, face difficulties in market financing, and it is not easy for domestic alternatives to emerge, let alone global competition. Therefore, it can be said that Da Vinci currently does not face much competition. Having a profit margin higher than the industry average is a sign of an excellent competitive landscape. Furthermore, the company continues to strengthen its moat by launching iterative products like Da Vinci Generation 5 to enhance performance. It has also made significant academic investments, including training doctors to use Da Vinci, hoping to achieve long-term binding effects. If this continues without interference from other competing products, most doctors in the future will rely on this machine for surgeries, creating an ideal long-term stable growth pattern, similar to Microsoft's dominance in operating systems. Therefore, there is a possibility of maintaining or even increasing the profit margin in the long term. The large market space, long-term stability brought by stickiness, and excellent competitive landscape have led to Da Vinci's high valuation. In fact, even when the market is not doing well, the valuation of this company remains high. At its lowest point in 2022, it was trading at 12 times PS, and now it is just the PS of a bull market. Coupled with revenue growth meeting expectations, it has unsurprisingly reached this market value. However, this does not mean it is reasonable. With a PE ratio close to 90 and a growth rate of less than 20%, it is also unlikely to achieve a significant breakthrough in profit margin. Even though it has a competitive landscape similar to NVIDIA, NVIDIA is currently superior in terms of PE, growth rate, and profit margin. In the same comparison, Da Vinci robots can be considered a bubble. Even if there are no competitors in the short term, based on the current growth rate and profit margin, it will be difficult to bring the PE ratio back to below 40 within 5 years. But whether there will be competitors within 5 years, that's hard to say. Looking back at the past 10 years, the company's growth rate has not been impressive, struggling to break through 20%+. It will require breakthroughs in new technologies and surgical applications, similar to the moments of GPT in the AI field and GLP-1 in the pharmaceutical industry. The current development pipeline does not show any signs of this yet, so don't expect it to take off like Novo Nordisk and Eli Lilly Conclusion In terms of products, Da Vinci Robot does have the opportunity to become the top tool provider in the medical field. However, such a market value can only be seen in the most optimistic market atmosphere, mainly because the company's growth rate has not broken through. From the pricing model, it can be seen that the most important factor affecting the stock price of US stocks is neither short-term profit indicators nor whether the company's valuation is safe, but the decisive factor is the competitive position. If a company has a large market space and absolute market share, it can achieve the most optimistic valuation of most companies even in the most pessimistic times.

There are also some domestic medical stocks that focus on surgical robots, but their trends are completely opposite to Da Vinci Robot, which is quite regrettable. Initially, whether entrepreneurs or investors may see the same great ending as Da Vinci, but as long as they choose to follow the imitation strategy, they are destined to always be in a competitive disadvantage position