NrdRage's Friday DD: A robot may not injure a human being, sure, but is it injury if the robot just makes you go broke? Today we answer that question and dividing by 0 ($ISRG)
EDIT: I guessed entirely wrong on the earnings with this one, they did a masterful job of lowering everybody's expectations and then blowing the doors off their quarter. I am, however, not taking down this DD both because the post-earnings long-thesis is still sound and...well...I don't hide from my misses.
HAAAAAPY Friday, $COIN bagholders and canine millionaires (jesus Christ, we really are in simulation)! This week was supposed to be about why you should short $PLUG and a thesis about why you should buy 29p's with the equity at 32 (something I hinted about last week in my $NEE DD), but it already got annihilated on its own and took out the entire green energy sector with it, and now I think it's almost so beaten down it might be time to go long again, so that's out. Let's see if we can't get you some of that money back, and enjoy some really bad CGI in the process instead. This week, let's examine a company which, inexplicably, came out with a robot that can perform surgery 20 years before someone figured out how to automate the cashier at McDonald's (how's that for a checkmark for simulation theory?). This week's examination is Intuitive Surgical ($ISRG).
What do they do? Well, the TL:DR is they help ensure that you have to wait longer before you can collect the inheritance and life insurance on your Boomer ass parents, because it helps keep them alive.
They're really more of a product than a company. (yeah, I know about the EndoWrist shit, but that's hardly a revenue generator) They make the Da Vinci robot surgeon that you see in hospitals so long as you live in a nicer, more gentrified part of town. Or work for one of the Colombian drug cartels - those dudes have the best medics. If you've never heard of it, it's basically a Swiss army knife of attachments that will cut your ass open, fix what it can (sorry, that extra chromosome has to stay), and stitch you back up, all while your surgeon deals with his raging hangover and wonders what happened after he blacked out to where his ass is really sore this morning and the security guard out in the parking lot can't stop smiling at him. That's it. That's all they do. Blah blah blah proprietary software blah blah blah expensive maintenance contracts blah blah blah each attachment for the robot costs money so hopefully your hospital sprang for the clip applier attachment before they snipped that pulmonary vein. Fingers crossed.
Also, it apparently makes pancakes. :
Cause that's not creepy at all
Which goes to show how outdated the tech has become, since everybody knows ebelskivers are superior.
Deep dive: This won't hurt a bit, except for the parts where it's excruciatingly bad.
$ISRG is a 95 billion dollar company that sells about 1200 Treadwell Droids surgical robots a year at 2 million dollars a pop, and has come up with a great scam where some of the attachments are disposable so you have to keep buying them. God bless America. They make about a billion a year licensing out their software for use to mitigate the fact that your doctor can't remember which cord goes into which hole, and another 700 million or so on maintenance contracts to reboot the things when they accidentally kill somebody. They make about 4 billion dollars annually, give or take. For a company that lives and dies by its R&D, it surprisingly has no debt on the books. It just makes more shares when they need money. This also might have something to do with the fact that they haven't really improved on the thing in 20 years because nobody is forcing them to innovate. They're trading near their ATH, at 804.72 as of the time of this writing. The biggest fundamental thing to note about this company is that they basically have no competitors. There is a company out there called (name redacted because of automoddy) that made a run at the king, but fell so short that they changed their name from (name redacted because of automoddy) Surgical. It's not that their robot - the Senhance - was bad, per se, it was just that it turned out it was only good for laparoscopics, which is fairly niche. For the record, I like that company, but we can't talk about them here.
One thing I've always hated about this company but have held my nose and overlooked was that it's PB ratio is way out of whack for its space. The average company in the medical equipment industry averages about 5.1 PB. $ISRG sits at 9.7. Their PEG also sits at 6.5, which is fucking crazy.
Cool. So how much growth for buying in to the fucking robot army?
Actually....none. They made 2.64 a share a year ago, but the whispers on the street - and by street, I mean company executives - are to expect a down quarter this time around due to a combination of less hospital revenue as a result of leaving so much open bed space for the spicy flu and lower demand for elective surgical procedures - and, of course, by lower demand, I mean people being told they can't have them because there's a risk of catching a bug that you'll probably never even know you caught. $ISRG had been rising recently on the ASSUMPTION that hospitals were going to open back up to more high margin things like elective procedures and away from things like "leaving half the hospital empty in case 3 people catch the 'Rona". However, through the 1st quarter of the year, that has not happened, which means the backlog of surgical procedures just continues to grow. Ambulatory surgery centers throughout a good chunk of the country still haven't converted away from triage facilities yet or are closing down surgical theatres periodically to reallocate staff, and there's no real word on when that is going to get rectified.
Analysts have already been adjusting their expectations for the quarter downwards in the last month. Expectations are now a 4% drop in earnings on flat-to-slightly-up overall revenues. $ISRG has a habit of beating on earnings pretty much always, but they've reached such a lofty valuation that swapping out Tyson Fury for a Tyson chicken and then bragging you kicked its ass probably isn't going to be that impressive.
Wait...so why should I buy it?
Plot twist: This is a SHORT DD. My first one since the prophetic $PLTR DD that got -700'd on February 5th before I finally deleted it and let those retards lose their asses (I'm never going to stop saying I told you so, bitches). Bet that was harder to see coming than knowing Will Smith was going to become best friends with a toaster an hour before it happened, eh?
Actually, that's not entirely true. This is a hybrid.
Do technical analyses have feelings? Feelings are just electrical responses, and technical analyses are based on nothing but electrical responses.
The thing to note is that it's tested prices in the $81x's 3 times now (let's call it 810, because that's really where liquidity always starts to dry up), and has been rejected all three times. And it's sitting pretty damn close to that again. Also, every time it's tested resistance and failed, it's dropped to at least the mid 700's, usually crossing into the 6's briefly, which presently serves as strong support. It's presently trading near its ATH's not because of anything it's done, but rather because lately the trend has been to rotate into big growth companies again, forgetting that small and mid cap plays exist. That's all well and good, but one off quarter and you're no longer contributing to the artificial inflation of the $SPY. This has been a reliable quiet swing trader for me, but it's now at a crucial pivot point that's going to require a strong catalyst to continue any upwards momentum. That's bad news for a company reporting earnings in a time when even Wall Street darlings sell off even on great quarters. At the very least, this is a rally that is quickly running out of gas, as evidenced by reduced volume. With them reporting next week on the 20th, the pivot point of reckoning is upon us.
My logic is undeniable (or, to summarize):
- For the 2nd time in a row, an S&P 500 company that operates on the fringes of traditional growth
- Has positively ripped during this rotation from value into growth, in spite of all signals showing a down quarter and poor forward guidance as we are still in a period of Covidic uncertainty and what it means for the operating theatre
- Has no known competitors, which has not pushed them to expand into other revenue channels besides crazy expensive machines meant to cover up for how few decent doctors are entering the workforce anymore
- Is trading at a crucial resistance point that has been rejected forcefully 2 times in the past, with reduced volume each time
- IV on calls is quite pricey, but puts are dirt cheap
- If you really want dad's house, maybe make sure the ambulance sends him to Watts instead of Malibu. Remember, if he ends up surviving the procedure, he's going to rat you out to the cops
Price Targets:
I'm expecting a miss when they report earnings next week, or at the very least a very muted guidance. As such, I would not be surprised to see this stonk slip all the way down into the 720-740 range before it regains some footing. Barring some sort of catalyst, I'm having a hard time seeing how this is going to get over that 820 hump any time in the near future.
How to play it. That, detective, is the right question:
All the technical signs and oscillators are pointing to it becoming a very top heavy trade, which means it's primed for a much bigger negative breakout on the slightest weakness. All that said, I certainly wouldn't go bear on it long-term. $ISRG has never been one of the most violent movers, but it has a way of defying the odds, and has displayed that ability in the face of adversity for decades now. I think if they miss next week and the stock goes into a freefall, be prepared to be nimble and cash out the put and switch back to long, even if it's not necessarily justified.
An edit:
If you don't like the short action because of liquidity (a very valid item if you're interested in more than a handful of contracts), skip that part of it and set an alarm to go long at 725-ish. You'll be happy with that one, too.
Position Disclaimers:
I'm pretty sure I own more than a few shares of this in my managed asset portfolios and, even though my short-term outlook is bearish, am also fairly certain my fund managers aren't going to want to create a taxable event with them. I am just flat-out short on the stock itself, but my appetite for potentially unlimited risk is different, and I can't say anybody else should do that. I'm holding 4/30 780 puts that I picked up for 10-ish bucks, as well as 5/28 $800p's. I recently sold off my 7/16 795c's for a tidy profit. Were I less of a pussy, I'd probably buy some 4/23 780p FD's. Actually, I might do that for fun, anyways. But remember, I'm gambling on a selloff on weakness. If those further out puts print, I will cover them within a week or earnings and look for a consolidation pattern (probably a week or two later) to reverse course and buy some calls for another swing up.
Word of caution: Buying puts on a mega tech in this environment is an inherently risky move because big money has been rotating into it for weeks now. This is not a bet-the-house scenario. I have about a 70% conviction this is gonna go my way, but that other 30% is pretty ugly and basically guarantees a complete loss. And even if you do play this along with me and it prints, don't sit there and try to milk it for too long. Some hedge fund could decide it's oversold at 735 and eat away at your tendies. Fuck that guy. And then go buy one of these, because fucking him is legally perilous and he might fight back - the robot will never say no.
All my love
-Chad Dickens