Over the weekend I got a lot of questions about John Engel’s “Image Mapping” pitch for his Stansberry Innovations Report newsletter ($49, renews at $199), so that’s what we’re tasking the Thinkolator with today… what is this “Image Mapping” technology that he says will make us 5X our money?
Stansberry Innovations Report is quite new, an entry-level technology-focused letter that we’ve covered a couple times, and the teaser picks we’ve looked at from them so far have been pretty mainstream large companies with solid businesses (Qualcomm and Fortinet). Engel hasn’t come up in this space previously — he was in health care before coming to Stansberry, apparently, working in biotech and pharma, so he claims some expertise in this area… and he dangles the appeal of the lucrative “medical device” market that has made a lot of money for investors in the past. Here’s a little of the early hinting…
“… the device I’m telling you about will…
- Virtually eliminate the 3rd leading cause of death in America.
- Save as many as 251,454 lives every year.
- Free 6,200 hospitals from the threat of crippling lawsuits.
- Make brain surgeries and heart surgeries far safer.
- Save heart attack victims who would have died before they ever got to the hospital.
And help the blind see again.
“This technology will revolutionize the medical system.”
Why is that? Well, the angle here is that “medical error” causes roughly 250,000 deaths a year (tracking of this is spotty, as you might imagine, when compared to more defined things like “heart disease” or “cancer”), and that this “Image Mapping” technology will help to reduce those errors… and therefore hospitals will be willing to pay up for the technology, reducing deaths and also reducing their risk of being liable for big lawsuit settlements.
Here’s some more on that from the ad:
“The device that will help medical professionals eliminate mistakes uses a hot new technology called Image Mapping. Image Mapping allows surgeons and other health care providers to truly ‘see’ their patients….
“It looks a little like Virtual Reality goggles. But it’s very different.
“Virtual Reality looks at a pretend world. A world that doesn’t really exist.
“Image Mapping lays digital information over top of the real world.
“For instance, surgeons can take MRI or CT scans of patients. And then they can digitally lay those scans over the patients’ bodies on the operating table.”
OK, so what he’s referring to there is what almost everyone else would call “augmented reality” (or, more recently, “mixed reality”) — adding a “virtual reality” layer to the real world. If you’ve seen Pokemon Go, that’s augmented reality, too, using your phone’s camera to show the real world but also layering on it a 3D Pokemon for you to “capture,” though the promise of a hands-free goggle system that can layer what feels a bit like a hologram over your visual field offers the next step beyond that.
And this has long been one of the real “promise” areas for technology, the ability to provide you with more data within your field of view while you’re working. We’ve seen promises of this in other areas as well for years, of augmented reality “glasses” that can project the specifications for a jet engine and the way it’s supposed to look for a technician who is inside that engine making a repair.
So I guess the notion of augmented reality or “image mapping” in medicine is not terribly different… here’s a bit more from the ad:
“Surgeons can see precisely where to cut out a tumor. So, they won’t mistakenly leave some bits of tumor behind (which can let the Cancer grow back). And they won’t cut something they weren’t supposed to cut.
“Today, this kind of thing happens all the time. That’s why medical mistakes are the third leading cause of death in the U.S….
“… with Image Mapping, surgeons avoid making dire mistakes because the body part that should be operated on is precisely color-coded.”
And this is not “maybe someday” stuff, apparently, but is actually in use:
“Image Mapping is real. I’m not talking about stuff that could happen in the future. This technology is already rolling out right now…
“Doctors at Imperial College at St. Mary’s Hospital in London are already using Image Mapping during surgery.
“And other hospitals are waiting in the wings to get their hands on this technology.”
OK, so what other clues do we get? Engel says this market is expected to explode in size….
“In 2017, just 230,000 Image Mapping devices were sold.
“And it’s projected that in 2022 alone, 32.7 million Image Mapping devices will be sold….
“I’ve done the research. And I’ve discovered which companies will profit most from this new $198 billion market.
“The first company, as you might imagine, is a manufacturer of these Image Mapping devices.”
OK, so we’ve got a company that makes augmented reality devices… there are a few of these, which one is being teased? More hints…
“… the FDA has already approved the use of this company’s Image Mapping devices for medical applications.
“That’s why Case Western Reserve University… one of the best private research universities on the planet… and the world-renowned Cleveland Clinic have already partnered with this company to use its Image Mapping devices.
“It sells the device for $3,500 apiece. And with 32.7 million devices predicted to flood the market by 2022, there’s about $112 billion a year to be made.”
And apparently there’s a bit of a “razor and blade” model in here as well, with a recurring revenue stream…
“It’s offering up its Image Mapping devices bundled with software. The software provides remote support. Which is something users desperately need with this new technology.
“And the company charges $125 a month with the software bundles included.
“Which means, even if the company only gets HALF the market, it will add nearly $48 billion in recurring revenue, every single year!”
If we’ve learned nothing else in more than a decade of sifting through teaser pitches, it’s that copywriters are very skilled at making an extraordinary projection seem conservative — this is a market that does not even really exist yet, but it somehow sounds rational, in this context, that this company will get “only half” of this market, and that the market will really balloon 230,000 devices to 32 million devices in five years, and that these devices will somehow still cost $3,500 in three years. Those are all pretty substantial leaps.
But anyway, what is this stock? Thinkolator sez that this exciting medical device maker is… Microsoft (MSFT), which depending on the day you check, is the largest company in the world.
And yes, Microsoft does have probably the leading augmented reality device in the Hololens, which was recently (early this year) released in its second version and looks a lot more practical than the original space helmet-looking Hololens that was introduced in 2016.
And yes, the Hololens 2 does sell for $3,500 and it looks like they charge $125 per user, per month for the remote assist and the mixed reality app… though that might be a misinterpretation, they might actually just be charging $125/user/month as an alternative to the up-front $3,500 payment (the preorder page is here if you’re curious about details). And I should say that it doesn’t actually sell yet, it’s still in preorder and apparently has not yet been authorized by the FCC or other regulators.
Microsoft is not pushing this as a consumer device, but they are working to build a market for it — and medicine is a meaningful part of that, so they are working with the Cleveland Clinic and Case Western on clinical trials to enhance surgery with a Hololens view, and with the Imperial College on using CT Scan overlays during surgery to help locate blood vessels.
So yes, Microsoft is trying hard to be a leader in augmented/mixed reality, but in terms of medical applications we’re not talking about 30 million-unit business in three years… not even close. Any projections for massive sales like that would include a lot of other business applications, but also a pretty meaningful consumer business. There are also other meaningful competitors in the augmented reality “goggles” space, with the other one that gets a lot of press being the Magic Leap, which is much more focused on gaming and entertainment at this point… and Apple has reportedly been working on a “goggles” project for years, with some kind of augmented reality headset a possibility in the next year or two. My sense is that this will be a slow building business for Microsoft, but we’ll see.
Oh, and yes, we should reiterate that bit about Microsoft being The Biggest Company In The World — they currently have a $1 trillion market cap, and annual revenue of about $125 billion, most of which comes from their software and service businesses. I’m sure they’re committed to building the Hololens business, but it’s not going to compete even with the Xbox business in terms of revenue in the next few years, let along Azure (their cloud service) or Microsoft Windows or Office, and it will not generate any meaningful profit for a long time, if ever (Microsoft’s profit margins are huge, about twice as big as Apple’s, because they’re mostly a software business and that’s more scalable than building stuff).
So no, Microsoft shares will not be rising 500% in the next few years because of the Hololens — it’s a great company and I wouldn’t talk anyone out of buying shares, but don’t put your expectations that high or put a lot of weight on the Hololens when you’re thinking it over. And since Microsoft is so huge, the potential of Hololens specifically in the medical field to have any real impact on the company is almost infinitesimal… particularly given how slow the medical field is to adopt expensive new technologies (using augmented reality in the operating room is still experimental, and no one is going go be clamoring to adopt it until it either saves money or leads to better patient outcomes, and collecting data for those assessments will take a long time. And, of course, remember that if you own “the market” in the form of something like an S&P 500 index fund, you already have more than 4% of your portfolio in Microsoft… so even if you don’t buy shares directly, you’re not missing out entirely.
But Engel pitched a second idea, too — what’s that one?
“A Second Exciting Investing Opportunity Inside the Image Mapping Rollout…
“This second company that I’m going to tell you about happens to be the leading provider of surgical robots. Those robots assist surgeons in the operating room.
“The company sells the robots for $2 million each. And they’re already in an amazing 1,500 of the nation’s 6,250 hospitals.
“It’s also placed 719 robots in Europe, 561 in Asia, and 221 in other continents.”
Well, those numbers are just pulled from the wikipedia page for the da Vinci Surgical System, so I guess we can tell where we’re headed with this one… more clues…
“In Q1 of this year, it placed 27% more surgical robots than it did in Q1 last year….
“It recently changed business models. Instead of selling the robots outright, it now finances or leases them instead.”
And they don’t just sell robotic surgery machines…
“They’ve designed software that maximizes Image Mapping technology for a hospital setting.
“Even better, the FDA has just given the company the green light to begin selling this technology to American hospitals.
“So, the timing is perfect.
“The Image Mapping devices are already rolling. And the hospital-specific software for those Image Mapping devices is fully approved.”
OK, so yes, this is a pitch for Intuitive Surgical (ISRG) and its da Vinci surgical robot — and the augmented reality IRIS system that they’ve been adding to da Vinci (with FDA approval now).
Intuitive Surgical has essentially “owned” the robotic surgery market for 20 years now, with a few competitors trying (and mostly failing) to make a dent, and they probably have pretty good odds of continuing to dominate in the future thanks to their huge installed base and the thousands of surgeons who have been trained on their system — though there are more and more competitors coming, including very well-funded ones that are still quite nebulous, like Verb (backed by Johnson and Johnson and Alphabet), and fairly advanced ones like Medtronic’s Hugo that was introduced this fall, or Transenterix’s Senhance that has been trying with very little success to shave off a tiny piece of the market for several years (after Transenterix failed to get FDA approval for its previous SurgiBot). Intuitive Surgical is a valuable case study in the value of “first mover” advantages, in part because it’s really hard to convince a doctor to learn a second system or a hospital to buy another million-dollar machine if they’ve already committed to one brand and have had a good experience.
ISRG is not resting, though, they’re still trying pretty aggressively to increase that “installed base,” because their real profit comes from the growing number of surgeries performed (each surgery uses a “disposable” set of tools and accessories), so that’s why they’ve pushed forward in the past year or so with “alternative financing” in the form of what are effectively equipment leases to make their next wave of sales… trying, in investor parlance, to turn da Vinci from a piece of hardware into a “subscription.”
That shift to leasing has cut into revenue growth and earnings growth at Intuitive Surgical, since a sale of a $1.5 million product brings in a lot more immediate revenue than a lease does, but that will probably smooth out as it has for most other companies that went from a “product sale” to a “subscription” business. They still have remarkably good numbers, with a gross margin near 70% and return on equity of almost 20% even as they’ve been growing revenue and earnings by at least 20% a year, though the stock has been relatively flat over the past year or so as the market has slowed down a bit and it looks more or less like the stock is “paused” to let the valuation catch up.
Which is the only real negative I’m aware of for Intuitive Surgical… if it traded for 25X earnings, this would be a no-brainer of a stock, a dominant company that continues to grow its user base and expand into new kinds of surgeries, with a powerful first-mover advantage, a strong network effect, and a proven “razor and blade” model for recurring revenues that may be transitioning to an equally appealing “subscription” model. At 50X trailing earnings, though, it gets a little scarier… the analysts estimate that they’ll earn $13.72 per share in 2020 on still very strong revenue growth of 15% or so, and that would mean you’re paying about 38X forward earnings for ISRG shares at the moment. You can justify that for for 15-20% earnings growth and a long runway of likely future growth, but you can’t say it’s an easy bargain.
ISRG has historically been pretty volatile around earnings and other high-level updates, so do note that they’re reporting their next quarter on Thursday so things might change quickly. I’d be inclined to think positively about ISRG’s prospects now that they’ve had a year or so for the operating performance to begin to catch up with the fantastic stock movement, and because it grows harder every year to imagine a competitor really taking any share from da Vinci in robotic surgery installations… but at this rich valuation it’s also quite easy to imagine the stock either dropping 20% or floating around at a fairly flat level for another couple years if there’s any slowdown in procedure growth or the leasing program fails to keep installation growth growing. You don’t usually get to be profitable, growing and cheap, so perhaps we shouldn’t be too greedy.
So there you have it, dear friends — a couple companies that are, indeed, connected to the (likely to grow) use of augmented reality technologies in medicine… and they’re both large and dominant businesses in their sectors, though augmented reality is not their primary business or the near-term driver of their results. Both Intuitive Surgical and Microsoft are extremely well-covered in the financial press, to be sure, so there’s plenty of reading you can do to try to build your understanding if you like… and, of course, I hope you’ll share your thoughts about either of them (or your own fave in the augmented reality space, if you prefer) with a comment below. Thanks for reading!
Disclosure: I own call options and/or shares of Alphabet, Qualcomm and Apple among the companies mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.