Can This Moat Still Stave Off Invading Hordes?
How wide is that moat, really?
I recently owned up to my biggest mistake of 2011: assuming that I knew better than well-informed critics of OmniVision Technologies (NAS: OVTI) . My investment thesis for that stock was based on a technological advantage that essentially disappeared way faster than I had thought possible.
Rather than adjusting my own assumptions, I stuck to my guns -- and made the same bad call over and over again. Rivals have indeed caught up to what looked like an insurmountable lead in next-generation sensor chip designs -- without my approval. The nerve of these people! I'm still moderately bullish on the camera-chip maker, but a towering technology moat has shrunk to a mere value play with much smaller upside.
So why not take the next logical step and examine other core assumptions in my own portfolio? Today, I'm digging into Intuitive Surgical (NAS: ISRG) , which has become my largest single holding. That investment was based on one very simple premise: the robotic surgery specialist doesn't have any real competition.
Or at least it didn't in 2006 when I opened my first position in Intuitive Surgical. I've glanced at the situation once in a while since then, but never really dug into the competitive landscape again. Does this important assumption still hold water?
A random walk down Wall Street
First, let me turn to the supposed experts on Wall Street.
Standard & Poor's notes that the da Vinci surgical system is protected by 590 patents in the U.S and abroad, along with a strong lattice of regulatory approvals, "which we think act as significant barriers to entry by competitors."
Cantor Fitzgerald calls it "the developer of a market-leading, game-changing proprietary technology with no real competitive threats on the horizon." Canaccord Genuity sees "the best, most consistent growth company in the industry" as da Vinci keeps qualifying for new procedures. No competitive worries here, either.
What about my fellow Fools?
How about experts a bit closer to home? Our Rule Breakers newsletter has recommended Intuitive Surgical four separate times, with returns ranging from four-baggers to 10-baggers. The last dip into the robotic surgery pool was in 2008, but the newsletter calls Intuitive a Core Stock with a turn on the Best Buys Now list as recently as last October.
In the lively Rule Breaker message boards, criticism of Intuitive leans toward valuation problems and rarely mentions competitive threats. Grab a free 30-day trial pass to see for yourself. The stock also holds a 95% approval rating in our CAPS system, good for four out of five possible stars even at historically high valuation levels.
So it looks like my fellow Fools of various flavors aren't running scared of new competition, either.
Straight to the source
The company itself considers its primary competition to come from traditional surgery and alternative treatments. Intuitive has such a lock on the robotic techniques that competition within that space is hardly worth mentioning. In fact, Intuitive worries more about robotic manufacturing giants making a push into medical treatments than medical experts poking at robotics. Given the FDA clearances involved, that sounds like an unlikely source of serious rivals.
There's one direct rival in Canadian upstart Titan Medical. I think it's well worth keeping an eye on this company, even if it's a microcap development-stage operation today. Intuitive may need to deal with it in due time, perhaps checking whether Titan's Amadeus system infringes on any da Vinci patents or maybe even buying the company outright. Ignoring Titan would be silly in the long term.
The final verdict
All things considered, I think Intuitive still lacks any significant competition. Titan Medical is still far too small to make a measurable difference, and needs to run the gauntlet of FDA approvals before posing a real threat.
Other new-age surgical systems actually work in conjunction with da Vinci as often as they replace it, according to SEC filings: "We believe that our da Vinci Surgical System may actually prove complementary to these new technologies." That removes radiosurgery specialist Accuray (NAS: ARAY) and robotic joint maker MAKO Surgical (NAS: MAKO) from the equation -- though both look like terrific health care investmentsin their own right.
In fact, MAKO already rubs shoulders with Intuitive on the Rule Breakers scorecard. The company may sound like a natural rival here, but it's more into joint replacement -- dubbed MAKOplasty and enabled by its RIO system -- than the laparoscopic procedures performed by the da Vinci machine. And while Accuray's CyberKnife system seems like a challenge to Intuitive's robotic hands, it's only used to deliver high-precision radiation treatments. It's no replacement for human and/or robotic surgeons wielding an actual blade, but radiation and surgery can often be combined to treat very stubborn tumors.
So Intuitive Surgical remains a cornerstone of my personal portfolio, because the foundation of my thesis is intact after all these years. I was wrong about OmniVision but I remain confident in my assessment of Intuitive Surgical. And the company still has plenty of room to grow in the years ahead. Learn more about robotic surgery in this brand new special report from the Rule Breakers team. It's totally free but won't be available forever, so get your copy now.
At the time this article was published Fool contributor Anders Bylund owns shares of Intuitive Surgical and OmniVision, but holds no other position in any of the companies mentioned. The Motley Fool owns shares of MAKO Surgical. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical and MAKO Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.