Dreaming of Robot Doctors and Electric Cars
Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In investing, the greatest advantage an investor can have is a long-term investment horizon. Warren Buffett once said, “The stock market is designed to transfer money from the active to the patient.”
Therefore, true long-term investors, who are dedicated to holding stocks for decades, not months, should consider visionary companies that will shape the future of humankind. In this article, I’ll discuss three cutting edge companies that are revolutionizing their respective fields - iRobot (NASDAQ: IRBT), Intuitive Surgical (NASDAQ: ISRG) and Tesla Motors (NASDAQ: TSLA) - and how investors can benefit from their growth.
Rise of the robots!
Most people know iRobot for its autonomous Roomba vacuum cleaner. Yet fewer people realize that iRobot produced military robots for U.S. forces in Iraq and Afghanistan, which generated 40% of the company’s 2011 revenue. iRobot’s military robots are used for bomb sweeps and tactical operations, and were most recently used domestically during the Boston Marathon bombings manhunt.
After President Obama started to reduce the U.S. military presence in the Middle East, iRobot’s revenue from defense contracts plunged 57% year-on-year in 2012 and another 30% in 2013. Yet iRobot CEO Colin Angle was able to quickly turn lemons into lemonade by investing the company’s defense contract profit into peacetime robotics.
Angle invested heavily on the marketing and global expansion of the Roomba, which was initially released in 2002. As a result, the Roomba was transformed from a niche product into a mainstream one, and is now equipped with cutting-edge features such as room-by-room navigation, cleaning scheduling, and a HEPA filter. In addition, iRobot introduced the floor-scrubbing Scooba, the pool-cleaning Mirra and the gutter-cleansing Looj to join Roomba in its consumer division. This segment now accounts for 90% of the company’s top line, a 60% increase over the previous year. This swift recovery from the loss of its defense contracts boosted the company’s gross margin to 45% in the most recent quarter.
Boosted by the renewed strength of its consumer products division, iRobot is expanding into health care. iRobot recently introduced RP-Vita, a 5-foot tall remote presence robot that can be controlled by doctors via an iPad from several miles away. The robot is based on Roomba technology, and allows doctors to communicate with patients via video chat, make diagnoses, and even use an on-board stethoscope. The robot and its technical support costs $5,000 per month, and has already been deployed to six domestic hospitals and one in Mexico.
Speaking of expensive robot doctors...
iRobot’s strategy of moving robots into the hospital also relates to the future of Intuitive Surgical, the creator of the da Vinci surgical robot. The robotic system allows surgeons to perform minimally invasive surgery via robot arms by making precise micro-movements of instruments that can make incisions much smaller than human hands can make. The surgeon views the procedure through a stereoscopic lens, which provides a magnified 3D view.
Although this technology is impressive, it is also very expensive, costing $2 million for a single system along with hundreds of thousands of dollars in annual maintenance fees. To date, over 2,000 units have been sold worldwide. However, the potential for stable future growth is attractive, since each unit sold becomes a consistent revenue stream of maintenance fees.
However, the value of the da Vinci system was recently questioned by the Journal of the American Medical Association, which noted that complication rates of its robotic hysterectomies was at 5.5%, compared to a 5.3% rate for traditional surgical methods. The Journal argued that based on those statistics, the benefits of the da Vinci system might not outweigh the costs. James T. Breeden, MD, the president of the American Congress of Obstetricians and Gynecologists, also made similar comments in March supporting the Journal’s opinion.
However, those concerns were generally raised regarding da Vinci's urological and gynecological procedures, which account for 70% of its procedures. If doctors start to use the system for more complex procedures, such as cardiothoracic ones (which are currently undergoing tests), then the system could find a new source of growth.
But rich doctors still need fancy cars
Speaking of well-paid surgeons, let’s also turn our attention towards the toys of the affluent - namely fancy cars. These days, one high-end car company is garnering more attention than all the others - electric automaker Tesla Motors.
Shares of Tesla Motors have soared 240% over the past twelve months on gushing reviews of its recently released Model S, which retails for $70,000 to $80,000 before a government tax credit of $7,500. On a single charge, the Model S can be driven 230 miles on its 60 kWh battery and 300 miles on its 85 kWh battery, allaying the most common fears of an electric car running out of juice in the middle of nowhere.
Tesla sold 4,900 Model S vehicles last quarter, topping its prior outlook of 4,500 units. The company currently has the capacity to produce 25,000 vehicles annually, but new factory expansions could allow it to increase production to 100,000 vehicles.
Although electric cars are still a speculative niche market, CEO Elon Musk has rallied the support of some major energy companies, such as NRG Energy, to help build a network of supercharging stations across the country, built on top of existing power grids and extended through gas stations, stores and restaurants. 27 supercharging stations will be available across the United States by the summer, and Tesla claims that by the end of year, most major metropolitan areas will be covered.
Therefore, as Tesla’s vehicles get cheaper and charging infrastructure grows, this company also looks like a solid bet on a major paradigm shift in the future.
The Foolish bottom line
In the end, the future is a very speculative place to invest in. After all, all three stocks mentioned in this article aren’t cheap - iRobot trades at 36 times forward earnings, Intuitive Surgical at 24 and Tesla Motors at a whopping 116.
However, investors who plan to buy and hold stocks for decades should consider the long-term growth potential of these companies. If you believe that robotic doctors and electric cars will become a reality in your lifetime, then perhaps the time to buy is today, when other investors are still skeptical.
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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, iRobot , and Tesla Motors . The Motley Fool owns shares of Intuitive Surgical and Tesla Motors . 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!