Analysis: Our Take on the TransEnterix Stock Forecast Against Intuitive Surgical

TransEnterix stock
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TRXC Stock Price Crashes

Market watchers saw surgical robot maker Transenterix Inc (NYSEAMERICAN:TRXC) fall by double-digits last week, but that drop is useless without context. So allow me to provide a little background before getting to my TransEnterix stock forecast.

The first thing you should know: TRXC stock rose 465% in the previous 12 months. (That’s including the recent slump.)

Chart courtesy of StockCharts.com

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So if we’re going to parse daily stock movements, TransEnterix has come out a winner many more times than it’s come out a loser. In fact, it was on a merry rocket ride to the moon before June 28.

What crashed the party? An analyst report, of course.

Sean Lavin, an analyst at BTIG, LLC, downgraded the stock, saying (in so many words) that it was headed for a 40% correction. Naturally, investors panicked. (Source: “BTIG Turns Neutral On TransEnterix, Says Stock Rally Unsupported By Fundamentals,” Benzinga, June 28, 2018.)

Selling pressure began to build in the early trading hours, driving the all-star performer down by as much as 24.4%. Luckily for existing shareholders, though, cooler heads prevailed.

Sure, TRXC finished the day down 6.85%. But investors were clearly less worried about the report after a few hours of analysis. Or at least a few hours to read the damn thing.

They probably realized that while BTIG is a fine unit, it doesn’t have a crystal ball for regulatory decisions. And since TransEnterix is in the business of making tiny robots that cut open human beings, its fate will inevitably depend on whether or not regulators think it is safe.

So unless someone has a magical window to peer into the minds of Washington bureaucrats, investors needn’t take one analyst report so seriously.

What investors should take seriously, however, is TransEnterix’s main rival: Intuitive Surgical, Inc. (NASDAQ:ISRG).

TransEnterix vs Intuitive Surgical Stock

Robots doing surgery might seem like something out of an Isaac Asimov novel, but it’s actually happening right now. Today. In the real world. And the two companies working on this technology are open to retail investors.

But which one should you bet on? TransEnterix stock or Intuitive Surgical stock?

The latter is a clear frontrunner. It has a market capitalization of $51.3 billion—built off the strength of its “da Vinci” surgical systems—and fast-growing profits that continually exceed expectations.

Sales were up 24.7% to $847.5 million in the most recent quarter. This would be impressive by itself, but doing so while achieving a 59% increase in net income is downright Herculean. (Source: “Intuitive Surgical’s profit tops estimates as da Vinci device sales soar,” Reuters, April 17, 2018.)

TransEnterix is a different story.

Investors were doubtful at first, which, if I’m being honest, makes perfect sense. Buyers of robotic surgical systems are scarce. Meanwhile, the price point on such machines tends to be high, making them nearly impossible to sell.

Nonetheless, TransEnterix sold five of its “Senhance Surgical Systems” this year. We can attribute part of this boom to regulatory news, including U.S. Food & Drug Administration approvals for laparoscopic inguinal hernia and laparoscopic cholecystectomy surgeries. (Source: “TransEnterix Announces FDA Clearance for Expanded Indications for Senhance Surgical System,” TransEnterix, May 29, 2018.)

“There are approximately 760,000 inguinal hernia and 1.2 million laparoscopic cholecystectomy procedures performed annually in the U.S.,” said the company’s announcement. “With this clearance, Senhance System’s total addressable annual procedures in the U.S. has more than doubled to over three million.”

This sudden increase in potential took investors by surprise, which is why TRXC stock shot through the roof. Then FOMO (fear of missing out) kicked in, inspiring another whirlwind round of gains.

On the financial side of things, TransEnterix is a mixed bag.

Yes, its share price more than tripled from the start of 2018. But it also underperformed profit expectations in five straight quarters, and the valuation is absolute bonkers.

And yes, revenue continues to grow at a respectable clip. But the price-to-sales ratio is an uncomfortably high 82.35.

What are we to make of that? Surely, it means investors have priced a lot of growth into the stock. And if that is the case, then surely the recent correction in TRXC stock was justified.

Other TransEnterix News

Liquidity was a problem before TRXC stock joined the Russell 2000 Index. Investors were only trading six million shares a day. But since making it onto that list of corporate giants, average volume surged to 17.5 million. (Source: “TransEnterix, Inc. to Join the Russell 2000® Index,” TransEnterix, June 25, 2018.)

“We are excited to be joining the Russell 2000 Index, which puts us alongside many of the largest public companies in the U.S.” said Todd M. Pope, TransEnterix CEO. “We have worked diligently to create value for our shareholders, and we believe our inclusion represents a great opportunity to continue to do so by increasing our visibility and exposure to investors.”

Why does this matter? Well, for one thing, stocks listed on these high-profile indices tend to receive wider analyst coverage. They make it onto the radar of big investment funds and institutional players, in part because the indices are excellent markers of credibility and in part because they’re included in exchange-traded funds (ETFs) and mutual funds.

Whatever the reason, the increased exposure seems to work in favor of TransEnterix stock.

Analyst Take

Senhance Surgical Systems is an astounding investment story. But I wouldn’t bet on that tale continuing for much longer, since Intuitive is pouring money into product development.

When it comes to a well-funded giant with two decades of experience versus an upstart with nothing but grit and goodwill keeping it together, I’m always betting on the giant. Real life doesn’t feature too many David and Goliath upsets—bigger and stronger usually wins the day.