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Feb 14, 2017

S3 BLACKLIGHT: Intuitive Surgical Short Interest Hits Historical Highs

Short interest in Intuitive Surgical Inc. (ISRG US) has more than tripled in 2017, rising from $796 million in December 2016 to $2.7 billion today. The maker of the da Vinci robotic surgical system has seen double digit share price growth in 2016 and already in 2017, up 16.11% in 2016 and up 13.08% so far in 2017. ISRG’s stock price is up $6.60 in early morning trading today. Recent financials were positive, reporting $4.8 billion in cash, $736 million in net income, no debt and a projected 9%-12% increase in surgical procedures year on year. With such a large cash reserve ISRG also announced a $2 billion stock buyback.

On the downside, ISRG is an expensive stock with a P/E of 34-37. ISRG depends on the sale, support and upgrading of a very expensive piece of machinery, the $2 million da Vinci Surgical System, to sustain its attractive growth rate. The status of the Affordable Care Act and President Trump’s healthcare agenda may impact, either temporarily or permanently, hospitals’ ability to fund future capital expenditures. And finally, a joint venture between Alphabet Inc. (GOOG US) and Johnson & Johnson (JNJ US) to create a cheaper and more advanced robotic surgery system may finally create a viable competitor in ISRG’s space.

ISRG’s short interest has been very stable over the last five years averaging $815 million in 2016, in-line with its five year average of $810 million.  Short interest jumped significantly at the end of January with balances breaking through the $2 billion level for the first time historically. After hitting $2.5 billion on January 31st short interest continued to climb and is up $155 million, or 6%, to $2.66 billion in mid-February.

Short sellers have been taking it on the chin on their ISRG shorts for the past year, down $138 million, or 16.89%, in mark to market net of financing P\L in 2016. So far 2017 is not looking any better with shorts down $137 million, or 10.01%, (including today’s $6.60 increase) in mark to market net of financing losses.

With short sellers down $275 million in less than 14 months and short interest not only holding steady, but up 266% over that time period we can safely say that the shorts are holding onto their positions with conviction. Since ISRG’s short interest has only been over $2 billion for less than a month, if the stock continues to rally and hits the $800 price target recently set by BofA/Merrill Lynch then we will see if the short’s convictions hold as they incur an additional  $300+ million of mark to market losses. If the shorts get squeezed by this continuing rally and balances return to their five year average we would see almost $2 billion of buy to covers pushing ISRG’s stock price even higher. If ISRG growth falters and its EPS and stock price drops, shorts will begin recouping some of the $137 million of this year’s losses.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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