Source: Yaya Hong Kong Stock Circle Author: Kyle In the first half of this year, statistics show that at least 180 Hong Kong stock companies have implemented share buybacks, with a total amount of HKD 121 billion, setting a new high in the same period of history. Especially in the Internet companies, almost every shareholder return program has been significantly improved, which can be said to have opened a new era of Internet shareholder returns. Among these companies, Tencent, the "North Star" of Hong Kong stocks, is undoubtedly the most prominent. In the first half of this year, it contributed more than 40% of the repurchase volume of the Hong Kong stock market, firmly occupying the seat of the "repurchase king" of the Hong Kong stock market. In the second quarter, Tencent's single-quarter repurchase amount reached HKD 37.5 billion, which doubled from the first quarter's HKD 14.8 billion. The repurchase average price increased from HKD 290.6 to HKD 361.8, an increase of nearly 25%. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What is the concept of a one trillion repurchase plan? This amount is the sum of Tencent's total repurchase amount in the past ten years, which proves the management's confidence in future development and attaches importance to the demands of investors. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent has truly given back to shareholders in the capital market while achieving performance growth. One, the significance of a trillion repurchases is actively emerging. Looking back at the past two years, since Tencent's major shareholder Prosus began to reduce its holdings, the stock price has been somewhat suppressed. In particular, there have been regular trading behaviors in the market when Hong Kong stocks perform poorly. For example, Hong Kong-listed companies have a "silent period for repurchase" in the month before the financial report is released, during which repurchase is not allowed. This caused great upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As can be seen from the following data, of the five silent periods before the end of 2023, only Tencent's stock price in October-November 2022 rose, and in other times it fell. However, since the end of last year, Tencent's stock price has risen during two consecutive silent periods. Especially after the launch of the trillion-dollar repurchase plan this year, the repurchase volume has far exceeded the number of shares sold by major shareholders. Therefore, whether it is on normal trading days that can be repurchased, or during silent periods, the impact brought by the sale of major shareholders can be ignored, and this point is being formed by market consensus. For example, during the repurchase silent period from January to March this year, which happened to be the worst half-year Hong Kong stock market, the Hang Seng Index fell to 14,800 points. Tencent's performance during this period was significantly better than before. Even though the short selling ratio once reached 20%, the stock price did not fall, and the final interval increase was 6%. After the release of the better-than-expected 2023 annual report and the restart of the repurchase at the end of March, Tencent's stock price performed even better in the second quarter, with an increase of nearly 25%. During the same period, the Hang Seng Index and the Shanghai and Shenzhen Composite Indexes fell significantly, with gains of only 8% and 4%, respectively, while Tencent significantly outperformed the Hong Kong stock market with a gain of 25%. Behind this phenomenon, there is no doubt that the trillion-dollar repurchase plan, which has doubled from last year's amount, has played an important role. More importantly, after the repurchased shares are cancelled, Tencent's share capital has been declining for three consecutive years. Since 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent issued ordinary shares decreased by 1.1% compared to the previous quarter, and the repurchased shares have also been gradually cancelled since this year. This trend will continue to increase earnings per share and further enhance shareholder value. (Caption) Starting in 2022, Tencent has increased its repurchase efforts. With the repurchase cancellation, the company's total share capital has gradually decreased.
Currently, the US stock market is undergoing a high-level adjustment, with a distance from the index breakthrough. However, new high companies continue to emerge, while AI stocks are temporarily struggling at high levels. However, among blue-chip stocks, many have seen a sudden rise soon after a slight bullish catalyst in their financial reports. Inadvertently, the leading positions in some industries have changed.
Looking at the medical sector, the shadow of the post-epidemic is still present, and the overall index of the sector is still difficult to reach the peak of 2021. However, new leaders have emerged in both the pharmaceutical and medical device sectors.
$Eli Lilly and Co (LLY.US)$overtakes$Pfizer (PFE.US)$is becoming the market leader, although its revenue and profits are still catching up, its market cap is already triple that of Pfizer. In the field of medical devices,$Medtronic (MDT.US)$Also accounted for only 1/3 of the revenue. $Intuitive Surgical (ISRG.US)$ Replaced.
The huge prospect of both weight loss and diabetes medication can be seen by everyone. However, ISRG's market cap has surpassed many medical device giants such as Medtronic, Boston Scientific, etc., which is clearly not noticed. How has the medical device sector changed? Is the surgical robot just riding the wave of AI+ humanoid robots, or is there a real huge potential about to be unleashed?$Stryker Corp (SYK.US)$,$Boston Scientific (BSX.US)$The surgical robot sector has either hitched a ride on the trend of AI+ humanoid robots or is about to unleash its true massive potential, which is not being recognized as ISRG's market cap has surpassed many medical device giants such as Medtronic, Boston Scientific, etc.
I. Unimpressive performance
From a performance perspective, in fact, ISRG is far from perfect. According to the latest quarter's disclosed performance, revenue grew by about 14%, with a sequential growth rate of 5%, which is not considered high growth in the US stock market.
In terms of profit, the gross margin is still around 70%, and the profit margin is still not as high as the peak of 30% in 2021. Currently, it is still at 26%, with a profit of 0.53 billion for a single quarter. This is a huge gap compared to the market cap of 170 billion. Although the profit growth rate is better than the revenue, reaching 20%, it is still not an exciting data. As for performance guidance, the surgical guidance growth rate is similar to the first half of the year, and there is no surprise.
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.
And the company also mentioned that the gross margin of this quarter has a one-time boost effect, and it is still difficult for the long-term gross margin to exceed 70%. Surgical robots are still high-precision hardware that involve complex manufacturing processes. This type of hardware cannot achieve a large-scale reduction in manufacturing costs like the pharmaceutical industry, which makes it difficult for this industry to achieve a gross margin of 80%+ as easily.
ISRG's financial data is far from the pharmaceutical field$Novo-Nordisk A/S (NVO.US)$And it is far from Eli Lilly & Co. in terms of performance. Both have strong momentum, but also have strong performance growth. In terms of valuation, ISRG is much higher than them. ISRG's PS is 22 times, PE is 90 times, and there is no other fluctuation factor interfering with its performance.
It can be said that the market has extremely high expectations for this company, so high that it is difficult to understand. Such a high valuation also makes it difficult for people to separate the logic from it$Tesla (TSLA.US)$Besides autonomous driving, Tesla also maintains its inflated valuation with the concept of humanoid robots. After AI is able to understand verbal instructions, it can combine hardware to reshape productivity in the industrial sector and further enhance automation efficiency. If Tesla represents the industrial direction, then ISRG represents the medical direction.
However, from the perspective of current product application, there is no connection between ISRG's current product form and automated robots. Its operation is still based on the movements of doctors, but it maps the doctor's movements onto mechanical arms to improve accuracy, reduce fatigue, increase efficiency, and enhance surgical quality. It is impossible to operate the machine without a doctor or without a treatment instruction.
The ISRG robotic system currently appears more like a tractor to a farmer, a car to a driver, or a computer to an engineer. Calling it a mechanical arm is more appropriate than calling it a robot, and its business model is similar to those products.
In the application of large-scale models today, it is not very meaningful for improving ISRG's current operating mode.
Obviously, the current performance or the trend of AI is still insufficient to explain the valuation of a company like this.
Second, a good business model and pattern.
From the data, it can be seen that the previously undervalued leading companies in the field of medical instruments have their reasons, and a slight difference can be seen by comparing the net margin, and the growth rate is not impressive. Compared with them, ISRG is outstanding.
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 kind of company as ISRG. 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. Almost all medical instruments can find the figure of Medtronic, Boston Scientific, or one of their brands. This is the perception of these companies as being large and comprehensive.
But on the other hand, the product lines are large, research investment is scattered, and it is difficult to achieve economies of scale. It is much more difficult to achieve high profit margins with the 10 billion revenue generated by 1,000 products compared to a large single product with 10 billion in revenue. In addition, consumables involve a relatively high level of technology but are also consumer products with relatively low usage, making it difficult to establish a large-scale production line. Different categories of medical devices cannot share production lines, which ultimately leads to large-scale production lines and difficulty in concentrating research and development efficiency. On the other hand, companies focusing on single products in specific disease treatments can achieve breakthroughs and achieve good performance in revenue and profit margins.
Companies like Intuitive Surgical, which only have surgical robots and their corresponding services, do not have as many models of stents as Medtronic's entire heart product line when combined. Similarly, Edwards Lifesciences has a simple product line focusing on TAVR, but it can also break into the top 10 in terms of market value. These are the successful examples of the single product strategy. So this also explains the high profit margins and reasonable high valuations of these companies.
ISRG's business model should be compared to the former Siemens Healthcare and GE Healthcare, both of which have the largest share of revenue in imaging equipment and are basically suppliers of expensive medical imaging equipment such as MRI for hospitals. These advanced medical imaging equipment also effectively solve complex diagnostic tasks that cannot be accomplished by the naked eye of doctors. However, the market performance of these two companies' market caps is also unsatisfactory.
If they are compared to ISRG, several differences can be found. First, medical imaging equipment has been widely used in medical institutions after decades of penetration, and there is limited room for increase in sales. In order to grow and scale, these companies have already developed product lines of multiple categories of medical devices, which are relatively complex.
And currently, ISRG's applications in many surgeries have not yet been fully implemented, and the validation of each new surgical procedure will expand product sales. Currently, it is only used in laparoscopic surgery, such as general surgery, urology, and gynecological surgery. Orthopedic and pulmonary surgeries are currently undergoing validation and volume expansion. 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 growth in robot surgeries.
At the same time, surgical robots have also become the foundation tool for remote medical care. Many skilled doctors can remotely perform surgeries on patients in underdeveloped or remote areas with the help of low-latency networks and surgical robots. It is also an important means to distance medical skills. The significance of this tool is much greater than that of imaging diagnostic equipment. This also makes people see the possibility that surgical robots will become a high-value and high-penetration basic equipment in the future.
On the other hand, ISRG is currently dominating the field of core laparoscopic surgical robots. The surgical volume of the second-ranked company is almost negligible.
In comparison, the field of imaging devices has Siemens (ADR), General Electric, and in addition to these, there are also Japanese companies such as Canon. $SIEMENS AG (SIEGY.US)$ General Electric$Royal Philips (PHG.US)$In addition to these, there are also Japanese companies$Canon (7751.JP)$,$Hitachi (6501.JP)$Fuji and other exceptional competitors have intensifies the market competition, which has brought down the average industry profit margin.
Until now, ISRG has not had any real competitors. Companies like Medtronic, General Electric, and Johnson & Johnson have all launched surgical robots, but they cannot gain market share.
This competitive landscape can be compared to$NVIDIA (NVDA.US)$In the field of AI computing power, it currently has a dominant position. Currently, there are many start-ups in the field of surgical robots in China, and their determination to catch up is at least better than Medtronic. However, their scale and funding are too poor, and market financing is difficult. Domestic substitution is not easy, let alone global competition. So, it can be said that ISRG really has no competition.
Having a higher profit margin than the industry is a sign of excellent competition. Moreover, the company is still increasing its moat, including launching the iterative product da Vinci Generation 5 and continuing to improve performance. At the same time, it has made a lot of academic investments, including training doctors to use ISRG habitually, with the hope of achieving a long-term binding effect. Once this continues without interference from other competing products, most doctors in the future will not be able to perform surgeries without this machine. This would be an ideal scenario, just like a long snowfall on a steep slope.$Microsoft (MSFT.US)$Just like the operating system domination, the current profit margin has the possibility to be maintained or even increased in the long term.
With a large market space, long-term stability brought by stickiness, and excellent competitive structure, ISRG has a high valuation. In fact, even when the market is not good, its valuation is still high. In 2022, the lowest point was also 12 times PS, and now it is just the PS of a bull market. Coupled with revenue growth as expected, it has reached this market cap without surprise.
However, this does not mean it is reasonable. With a PE ratio close to 90 and a growth rate below 20%, it is unlikely to have a significant breakthrough in profit margin. Despite having a competitive structure similar to NVIDIA, NVIDIA is superior to ISRG in terms of PE ratio, growth rate, and profit margin. When comparing them in the same context, ISRG can be considered as a bubble.
Even if there is no competitor in the short term, based on the current growth rate and profit margin, it will be difficult for the PE ratio to drop below 40 times in the next 5 years. However, whether there will be competitors within 5 years is uncertain.
Looking at the historical data of the past 10 years, the company's growth rate has been unable to accelerate and break through 20%+. It requires breakthroughs in new technologies and surgical applications, similar to the moments of GPT in the AI field and GLP-1 in the pharmaceutical field. The current development pipeline has not shown this trend yet, so do not expect it to take off like Novo Nordisk and Eli Lilly & Co.
Conclusion
In terms of products, ISRG does have a good chance of becoming the top provider of tools in the medical field. However, such a market cap can only be seen in the most optimistic market environment, mainly because the company's growth rate has not had a breakthrough.
What can be discovered from the pricing model is that the most important factor affecting the stock price of US stocks is not the short-term profit indicators, or whether the company valuation is safe, but rather the competitive position. If a company has a large space and absolute 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 ISRG, which is quite disappointing. Initially, both entrepreneurs and investors may have seen the same ultimate goal as ISRG, but choosing to follow the imitation strategy naturally condemned them to eternal competition in the lower ranks.
Editor / jayden