Mako's Miss Could Bode Ill For Intuitive Surgical

May. 8.12 | About: Intuitive Surgical, (ISRG)

Mako Surgical (NASDAQ:MAKO) reported earnings after the bell on Monday. The report deeply disappointed investors and the stock was down some 30% after hours. It missed both on the top and the bottom lines and issued guidance that was significantly under expectations. MAKO sells similar products to the same customer base as Intuitive Surgical (NASDAQ:ISRG). Given the huge run up in the stock over the last six months and its extreme valuation, I would be concerned if I was an ISRG shareholder.

Red Flags for ISRG:

  • ISRG Insiders sold approximately 20% of their total shares in the last six months and were particularly active in April.
  • MAKO sold significantly fewer of their robotic RIO systems in the quarter than expected. This could point to a downturn to growth in Da Vinci sales if the same factors come into play as the companies sell to the same customers.
  • The stock has gone parabolic since October adding over $200 a share without so much as a breather and looks overextended. (See Chart)

(Click to enlarge)

4 additional reasons ISRG seems overvalued at over $560 a share:

  • The stock has a five year projected PEG that is approaching 2 (1.88).
  • Intuitive Surgical is selling at over 12 times revenues.
  • In the last three months, consensus earnings estimates for FY2012 and FY2013 have gone up 2%; the stock has appreciated over 15% in that same time span.
  • Revenue growth is slowing as the law of large numbers starts to impact the company's sales as was articulated well in this article recently.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.