Inflation fears, interest rate hikes, potential recession, and geopolitical situations have weighed heavily on the market this year with the S&P 500 being down 18% so far. Most growth stocks got hammered this year despite outstanding financials.
Some of these top growth stocks are part of nascent industries that have a long way to go. Two such monster stocks with bright futures are healthcare company Intuitive Surgical (NASDAQ: ISRG) and U.S. cannabis company Cresco Labs (OTC: CRLBF). Both Intuitive and Cresco have plenty of room to run. Let’s take a look at their prospects.
1. Intuitive Surgical
The robotic surgery market is growing rapidly. Intuitive dominates this market with its wildly popular state-of-the-art da Vinci robotic systems. These machines help perform minimally invasive surgeries, which are primarily elective procedures.
With the ongoing pandemic, hospitals and patients postponed all nonessential surgeries. Though robotic surgeries are the sole source of revenue for Intuitive, the company still managed an outstanding performance every quarter. That is, however, until Q2 disappointed investors due to a dip in systems placements. It installed 279 da Vinci surgical systems in the quarter, a decline from 328 systems installed in Q2 2021.
It still reported a 14% surge in worldwide procedures performed using the systems that drove its revenue to $1.5 billion in Q2, up from $1.4 billion in the year-ago period. The company also adds the sale of disposable instruments and accessories used during these surgeries to its top line, which grew 12% year over year to $895 million.
Not only do hospitals buy these systems but they also spend a great deal of money to get their surgeons trained to use these. At the end of 2021, Intuitive reported that it had installed close to 6,500 da Vinci surgical systems in 67 countries and trained more than 55,000 surgeons to use them. Peers Johnson & Johnson and Medtronic have entered this market with their versions of robotic systems to compete with Intuitive.
However, Intuitive already dominates this market with a 70% market share, according to BIS Research. Even if a cheaper product is available, it is unlikely they will be successful anytime soon because of the high switching costs, thus protecting Intuitive’s revenue for years to come.
2. Cresco Labs
Cresco Labs sells medical and recreational cannabis products through its 50 dispensaries in the U.S. The drug is illegal federally, which is why cannabis companies cannot transport it across state lines. Obtaining capital is also a challenge for multi-state operators (MSOs). It is impressive that despite these challenges and with just 50 stores, Cresco has managed to earn $822 million in revenue over the trailing 12 months.
Perhaps credit can be given to its strategy of targeting limited-license markets such as Illinois and Pennsylvania. These state markets issue licenses to select cannabis operators. This strategy has helped Cresco get a loyal customer base and build up its brands. The MSO’s revenue surged 20% from the prior-year quarter to $214 million in Q1. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also showed a jump of 45% year over year to $51 million.
Cresco made a power move this year by merging with another rising cannabis company, Columbia Care (OTC: CCHWF). Recently, Columbia Care’s shareholders approved the deal, which is expected to close by the fourth quarter. It was smart of Cresco to acquire another strong company when valuations are low to minimize competition.
Plus, with Columbia’s assets in its portfolio, Cresco will own 131 dispensaries in 18 states. Combined, Cresco will be a much bigger and stronger company. Profitability might not be much of a challenge then. It can also give a tough fight to two other strong contenders in the U.S. market. Trulieve Cannabis and Curaleaf Holdings operate 165 and 128 retail stores nationwide, respectively. Each has earned around $1 billion in revenue over the trailing 12 months.
Bullish outlooks in the long term
Investors should note that the pandemic-related concerns are temporary. Those concerns will wane one day, and when they do, elective surgeries will be in demand again. With Intuitive’s da Vinci system already successful, its revenue and profits will keep growing. The robotic surgery market is estimated to grow to be worth close to $15 billion by 2029. This market is yet to be fully explored, leaving a lot of opportunities for Intuitive in the long haul. It ended the quarter with $8.1 billion in cash, cash equivalents, and investments that could help fund its future growth strategies.
Similarly, the U.S. cannabis market could grow at a compounded annual growth rate of 14% to be worth $57 billion by 2030. Note that this estimate includes sales from current legal states. The market could be worth more than $72 billion by 2030 if the remaining 18 states legalize cannabis. Cresco ended the quarter with $179 million of cash on hand, which should help fund its expansion plans this year.
Wall Street analysts, on average, are bullish on both Intuitive and Cresco Labs’ stocks. If you have an investment horizon of five years or more, these two growth stocks trading at bargain prices can be bought without hesitation.
Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cresco Labs Inc., Intuitive Surgical, and Trulieve Cannabis Corp. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.