Key insights
- Billionaire Ken Griffin's Citadel Advisors significantly reduced stakes in Amazon and Nvidia during Q1, reallocating capital into healthcare giant Intuitive Surgical. Despite facing competition and margin headwinds, Griffin's move suggests a bullish outlook on ISRG, potentially signaling a rotation from high-flying tech to undervalued healthcare plays. This could indicate a broader market sentiment shift, favoring companies with strong fundamentals facing temporary challenges.
Ken Griffin, the billionaire CEO of the investment firm Citadel Advisors, has an impeccable reputation on Wall Street, having delivered superior returns over the long run. It's no wonder, then, that every move he and his team make is carefully scrutinized. And he was a busy man during the first quarter. Citadel Advisors decreased its stake in some popular artificial intelligence (AI) stocks. The firm sold 2.9 million shares of Nvidia (NVDA 2.16%), while offloading six million shares of Amazon (AMZN +0.05%).
Both tech leaders remain among Citadel Advisors' largest holdings, but perhaps the decision to reduce its stake in these companies was to reallocate capital into attractive opportunities. And one notable stock that Citadel Advisors bought during the quarter looks like such an opportunity.
Intuitive Surgical (ISRG +0.13%) has lagged the market recently. The company is dealing with headwinds from multiple sources. Let's consider three of them. First, Intuitive Surgical will face increased competition in the robotic-assisted surgery (RAS) market moving forward. Last year, Medtronic earned approval for a competing system, the Hugo, while Johnson & Johnson is also racing toward clearance of its own device, the Ottava.
Second, several of Intuitive Surgical's products, including its da Vinci 5 -- the newest model of its famous, market-leading da Vinci system -- carry lower margins than the company's average. Selling more of these platforms can drag down margins, at least in the short term. Third, steep tariffs have impacted Intuitive Surgical's financial results. Because of all these factors -- and despite pretty strong financial results -- the stock has dropped by 20% over the past 12 months.
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Given all the problems Intuitive Surgical is facing, why did Citadel Advisors take this opportunity to increase its stake in the company by 30.3% during the first quarter? One likely answer is that, despite the medical device specialist's struggles, its long-term prospects remain bright, and it could deliver superior returns, especially at current levels. None of Intuitive Surgical's obstacles is anywhere near insurmountable.
Yes, competition will increase, but the company has a massive lead, having spent the past 26 years since the da Vinci system was first launched expanding its installed base, improving patient outcomes, and gathering real-world data from procedures to inform its device development.
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Further, Intuitive Surgical benefits from a wide moat due to high switching costs, and the company still has a massive addressable market to tap into. It's also worth noting that it could be one of the winners as AI continues to transform the healthcare sector. Intuitive Surgical is actively exploring ways to use AI to improve its technology, which could help cement its leading position in its niche over the long run.
How will the company address lower margins on some of its devices? Those should pay for themselves several times over, eventually. Absorbing lower margins in the early stages of scaling a new device helps the company grow its installed base and eventually results in stronger revenue and earnings from the sale of instruments and accessories, which are replaced regularly and generate recurring, higher-margin revenue for the healthcare giant. So, this strategy is well worth it.
And as far as tariffs are concerned, Intuitive Surgical can deal with them eventually through modest cost increases across its large pool of existing customers, most of whom should stay put, given the few alternatives to Intuitive Surgical's devices on the market.
The bears would also point out that Intuitive Surgical still looks expensive, trading at 39.7x forward earnings, more than twice the healthcare sector's average of 17.4x. Even so, Intuitive Surgical continues to grow its revenue and earnings much faster than most of its peers, especially those in the medical device niche. Further, the company's large addressable RAS market and strong competitive edge help justify a steep premium. My view is that Intuitive Surgical is a strong buy after having lost significant value over the past year.