Can MAKO Cross the Chasm?
Erik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After an exciting four-year run of promising growth, MAKO Surgical (NASDAQ: MAKO) has stumbled in the past two quarters. In response, the stock market has taken it behind the woodshed for two good spankings: down about 30% in May ($40s to $25s) and another 50% hit earlier this month ($25s to $13s). Investors must now decide whether this is the beginning of the end for MAKO or an excellent buying opportunity. Can MAKO still be the next Intuitive Surgical (NASDAQ: ISRG), or will it disappear into history's high-tech dustbin?
That requires backing up to answer a deeper question: What's up with MAKO? Why the unexpected stumbles when everything looked so rosy?
High-Tech Marketing - The Early Concept
Geoffrey Moore tackled this question specifically for high-tech companies in his best-selling book, Crossing the Chasm. He identified a flaw in how high-tech companies approached their marketing, a flaw that time and again sent promising companies into an irrecoverable spiral into the abyss.
High-tech marketing sorts potential customers into five categories: Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. Marketing begins with selling to the first category. Once they succeed there, they then segue seamlessly to the next category, and so forth. Paydirt is reached when the two Majority customer groups are fully accessed.
Or so the thinking went.
The Flaw & The Chasm
Yet promising company after company failed to reach the Early Majority. Moore recognized that the needs of each customer group are unique. Marketing cannot "seamlessly segue" from one customer category to another; it must change how it markets the product and the product must adapt to meet the unique needs of each group. There is, therefore, a disjoint between each customer group to which every high-tech company must adapt or die.
The largest disjoint is between the Early Adopters and the Early Majority. It is so wide and so perilous to companies that he called it "The Chasm." Each company must make a major shift in product utility and, especially ease of use, and marketing must overhaul how they present the revised product to reach the Early Majority. If they don't, their swimmingly successful sales will falter and fade away. Sound familiar?
This is where MAKO is today. It has arrived at and courageously begun to cross the Chasm. Knowing this, we investors must determine their odds for successfully crossing that chasm and bringing the Early Majority customers onboard.
Do they Have a Clue?
To begin with, a company must know it is crossing the Chasm to have any hope of making it across. Otherwise it's game over and we investors can call it a day. Does MAKO's management recognize the transition in front of them?
The first clue comes in the most recent conference call. The CEO often referred to "pragmatic customers" making up more of their sales pipeline. These are the Early Majority of Moore's book. Ferre recognizes he is facing a sea change.
The second clue was like a bolt of lightning: MAKO recently fired its VP of Sales & Marketing. This role, above all others, has the most direct control over a successful navigation of the Chasm. Now we must carefully watch to see if his replacement can get past the Early Adopter mentality to embrace that of the Early Majority.
What does a Successful Crossing Look Like?
While it's difficult to assign odds to success, one can at least identify concrete results that indicate progress across the Chasm, or a faltering into it. Here are some specific, positive events to look for:
MAKO's surgeon training facility is fully booked. One could say this is a good sign, but I suspect they have insufficient capacity to address the Early Majority customers. Look for a significant investment to increase surgeon training capacity.
Steady sales of RIO surgical robots will indicate they have begun to make and grow a small beachhead into the Early Majority group. Sales don't have to climb yet to indicate early penetration; they just have to keep a steady, but relentless, rate of sales. I give them about a year, two at most, to make the product and marketing transition, the crossing of the Chasm, and then sales must take off for the moon.
Gradual but steady growth in surgeries per installed RIO will indicate that more and more surgeons are using MAKO's products, and thus that Early Majority customers are coming aboard.
Lastly, I want to hear MAKO's management blatantly discuss with specifics what they are doing to adapt their marketing and products to reach the Early Majority. I want to know they are in clear command of the situation.
How is MAKO Doing So Far?
To date, MAKO is making progress on the surgeries per RIO, and they have replaced the VP of Marketing to address the transition. Sales are muted, especially compared with their stellar 2011Q4 results; but compared to a year ago one could suggest that sales have stabilized at a modest but steady rate. We must wait and watch expectantly for the next couple of quarters of sales to know for sure. As for training facilities, I haven't heard any rumblings yet; but I'll be keenly watching for it.
It's still early in the crossing so this drama has only begun to unfold. Intuitive Surgical's crossing was equally as harrowing as MAKO's is already proving to be. Look back as ISRG's stock price from circa 2000 to 2003. It plummeted from the $30s down to the abyss of $6 in 2003, only to rise again to the $30; and now, having successfully crossed the Chasm, it sits at a phenomenal $500.
The further along MAKO progresses in their transition, the sterner we must assess their odds of success, for they have but limited time and funds, and thus only this one chance to cross the Chasm. But sweet success, for the company and those brave investors who hang in there, will be extraordinary - if it comes to pass.
Fool blogger Erik Eason owns long stock positions in MAKO and ISRG. He wishes to thank fellow Fool, "bkramerfool", for first associating MAKO with Moore's work. The Motley Fool owns shares of Intuitive Surgical and MAKO Surgical. Motley Fool newsletter services recommend Intuitive Surgical and MAKO Surgical . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.