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Friends,

Few companies check as many boxes for us as investors as Intuitive Surgical.

For those unfamiliar, Intuitive Surgical invented robotic surgery. Its da Vinci system has become the gold standard device in its industry. It's so popular that Intuitive holds a near monopoly position.

What makes Intuitive Surgical such an attractive investment is its killer combination of a wide moat and lots of optionality:

• Wide Moat: Hospitals put down $1.5 million for a da Vinci. Surgeons devote hundreds of hours training with it. Neither one has the time, money, or interest in switching to an alternative system.
• Optionality: As surgeons use da Vinci, they experiment. Over time, this has massively expanded da Vinci's use cases -- a win for Intuitive, hospitals, and patients alike.

This combination has enabled Intuitive's stock jump 14,600% since its 2000 IPO. It's been one of the best stocks you could have owned over the past two decades.

Despite all of the positives, we publicly debated the merits of investing in Intuitive Surgical in December 2022.

Why was there a debate? In a word: Valuation.

Based on the estimates we made using our reverse DCF calculator, at the time, Intuitive would have to grow its free cash flow by 28% per year...for ten years... to justify its price.

After some back and forth, we decided to hold our nose and allocate a small part of our portfolio to the business.

We bring this up because Intuitive Surgical came out with earnings recently. The company blew past all expectations. The number of procedures grew 26%, far faster than anyone was expecting. And analysts noted that the switching costs away from the platform were growing wider by the day.

The results serve as a strong reminder that some companies with "expensive" stocks are valued that way for a reason: they create things no one else can, and the world wants more of what's being offered.

All of this is to say we've landed on an investing approach that helps us balance between business quality and valuation.

Business quality (i.e. "moat and optionality") informs whether a company deserves a spot in our portfolio; valuation informs how much of the stock we feel comfortable buying.

That's far from the only way to go about investing. But it's what works for us.

Wishing you investing success,

- Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. The next cohort of Financial Statements Explained Simply launches in May! We are hosting a free "Introduction To Accounting" webinar on May 5th. Interested? Join us. Can't make it live? We'll send all RSVPs a replay.

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