Intuitive Surgical, Inc (ISRG) is the designer, marketer, and manufacturer of the da Vinci System, a robotic-assisted surgery apparatus. The system helps to make surgeries less invasive, with superior results. The system is used for a wide variety surgery types and is present in nearly all of the major hospital systems in the United States. As of June 30, 2021, there were 6,335 systems installed worldwide. (See Intuitive Surgical stock charts on TipRanks)
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This writer is bullish on the stock.
Recurring Revenue & Massive Moat
Intuitive Surgical does not just make money on the sale of the actual surgical systems. Were this the case, as the market becomes increasingly adoptive of the technology, the revenues would decline. Instead, ISRG also sells the accompanying single-use instruments and accessories and machine services. This provides for tremendous recurring revenue. Nearly 75% of revenue in the first six month of 2021 was from these recurring sources. Revenues were up over the same six months in 2020 by 40%.
The company also has a tremendous moat. Surgeons train on these machines for thousands of hours. Hospitals spend large sums of money to acquire the systems and the regulations governing use are vast. These all add up to extremely high barriers to entry for competitors and very high switching costs for surgical providers. For this reason, there is no major competitor that is considered a serious threat to results currently in the market.
Outperformance Across the Board
Intuitive Surgical has returned 375% to investors over the past five years, with no signs of slowing.
During this time revenues have grown more than 90%, cash from operations has grown more than 70%, and diluted earnings-per-share (EPS) has more than doubled from fiscal 2016 year end through the current trailing twelve months according to company SEC filings. This is despite the slowdown in elective procedures 2020, due to COVID-19.
ISRG has also amassed a giant stockpile of cash and short-term investments.
The company earns interest on these short-term investments. At last report, it had $2.82 billion invested and earning interest, with another $1.61 billion in cash and equivalents. The company has no long-term debt. It is able to do this because it has a net income margin over 30%. This margin is one that most companies would love to have as an EBITDA margin.
Upcoming Stock Split
The Board of Directors of Intuitive Surgical approved a 3:1 stock split on August 5th, 2021. The stock split will take place after market close on October 5th, 2021. The split must be approved by the shareholders but this is merely a formality.
ISRG stock has split before. It last split in October of 2017. Since the actual split in 2017 the stock is up 188% compared to 86% for the S&P 500 index. Since the split was announced in 2017, however, the stock is up 232%. This is because there is often an increase in demand for the stock ahead of the split. This is also true now as the stock has risen since the original announcement.
As would be expected from such a high-margin business with a mountain of cash, the forward price-to-earnings (PE) ratio is 80.1.
Wall Street is also bullish on Intuitive Surgical, however their price targets imply a valuation risk. There are five Buy and nine Hold ratings from analysts reported by TipRanks. The average Intuitive Surgical price target is $1012.08, with a 6.51% downside.
Intuitive Surgical is no stranger to the “overvalued” label, however it has outperformed as a company and as a stock for years, proving naysayers wrong.
Intuitive Surgical is a stock with much to like. Extremely high margins, growing recurring revenue, billions in cash and investments, and a mammoth moat. The stock has generated outsized returns for investors for over a decade. With the upcoming split, this is likely to continue for the foreseeable future. ISRG could be an excellent choice for long-term investors.
Disclosure: At the time of publication, Bradley Guichard had a position in the securities mentioned in this article.
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