On June 8, aspiring digital surgery company Asensus Surgical (ASXC) announced that its stock would be added to the Russell 2000 and Russell Microcap Indexes effective Monday, June 28.This announcement sent shares up 35% in June, compared with the S&P 500's 2% increase.
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The Russell Indexes are widely used within the institutional investor community as components of index funds and benchmarks for active investment strategies; approximately $10.6 trillion in assets are benchmarked against the Russell's U.S. indexes. So Asensus Surgical's addition prompted fund managers that track the Russell 2000 to add the stock to their portfolios, driving up the share price.
Short-term volatility creates long-term opportunity
While Asensus Surgical will be the beneficiary of increased attention from institutional investors going forward as a result of the addition to the Russell 2000, it will need to provide strong operating results to avoid being removed from the index in the years ahead. In fact, the temporary bump in its stock price has already faded; the company has fallen 32% from the high set in June.
Fortunately, Asensus Surgical seems poised to deliver impressive operating results in 2021. The company reported a 250% increase in its net revenues in the first quarter of this year ($0.6 million in Q1 2020, compared with $2.1 million in Q1 2021) and expects to install 10 to 12 new Senhance Surgical Systems in 2021.This should sustain operating momentum throughout the year.
Similar to Inituitive Surgical's (NASDAQ: ISRG) da Vinci system, Senhance is designed to take a minimally invasive approach to surgery, which uses clinical intelligence and "digitizes laparoscopic minimally invasive surgery, or MIS," improving a surgeon's control and reducing surgical variability from one surgeon to another. While Asensus Surgical did sell one of the Senhance systems that it previously leased out to hospitals in Q1 2021 , the company's sole product has only been on the market since it secured approval from the FDA in October 2017 , so the realistic expectation is that the company will be leasing out its Senhance systems over the next few years for the bulk of its revenues, and as hospitals around the world begin to see the value of the system in improving surgical outcomes and patient satisfaction, more lease buyouts will be completed.
Although the company suffered a 63% decline in revenue from $8.5 million in 2019 to $3.2 million in 2020, this was almost entirely a result of COVID headwinds as elective procedures were delayed, such as cholecystectomies and inguinal hernia repairs, which are two operations that the Senhance Surgical System is able to assist surgeons in executing.
Asensus Surgical is positioned for a tremendous recovery in the years ahead; Grand View Research is forecasting a 21.6% compound annual growth rate in the surgical robotics market, from $2.3 billion in 2020 sales to $14.0 billion by 2028. The company cites "the increasing number of approvals from regulatory authorities, such as the [U.S. Food and Drug Administration]," as well as "increasing adoption of robot-assisted surgeries such as hysterectomies, the rising number of robotic systems for surgical interventions, and the constant R&D for robotic surgical technologies" as key factors in its growth projections.
While Asensus Surgical faces competition from other players, such as industry leader Intuitive Surgical and other companies with deep pockets like Medtronic , seizing even a 1% share of that 2028 market (versus the 0.14% market share Asensus Surgical commanded in 2020) and establishing itself as a mid-sized player in a segmented market would result in a more than 40-fold increase in revenue, to $140 million, in 2028, which works out to just over 4 times the company's current $600 million market cap.
This seems to be a reasonable projection given that the tremendous growth potential of the overall surgical robotics market precludes a zero-sum market where one company wins and all others completely lose as there will be varying degrees of success rather than failure. Simply put, it will be difficult for one company to completely meet the projected industry demand.
Growth on the horizon
The recent stock volatility has offered investors with a long-term ownership mindset the chance to pick up shares in Asensus Surgical before the company capitalizes on the surgical robot trend and cements its place as a midsized player in the space. As long as surgeons continue to see the utility in the company's technology, there's solid growth ahead.
