Intuitive Surgical: Great Company Despite Short-Term Headwinds

As hospitals again fill with COVID-19 patients, non-emergency surgeries may be delayed. These delays could potentially hurt Intuitive Surgical’s results. With Omicron washing through the U.S., is Intuitive Surgical (ISRG) stock still a buy?

Intuitive Surgical designs, markets, and manufactures the da Vinci Surgical System, a robotic-assisted surgery system. The system helps to make surgeries less invasive, with superior results. The da Vinci system is used for various surgery types and is utilized by major hospital systems globally. As of September 30, 2021, there were 6,525 systems installed worldwide.

This writer is bullish on the stock.

Solid Q3 2021 Results

Intuitive posted typically solid numbers for Q3 2021, albeit slightly down from Q2 2021. Revenue for Q3 2021 came in at $1.4 billion, down slightly from $1.46 billion in Q2 2021. However, 30% higher than in Q3 of 2020. Revenue was off somewhat because of temporary headwinds related to COVID-19.

Many other metrics were outstanding, as we have come to expect from Intuitive. The gross margin was near 70%, while the operating margin came in just shy of 32%.

Overall, the company made $381 million in net income in the quarter. Over the trailing twelve months (TTMs), the company has made about $1.7 billion in net income on $5.5 billion in revenues. This is a net margin of over 30%, which is incredible for a product-based company.

Intuitive also finished Q3 with $8.2 billion in cash, short-term, and long-term investments on the balance sheet. This is up from $7.8 billion at the end of Q2.

These investments provide the company with interest revenue, which will increase as rates rise. This comforts shareholders with inflation fears and a more hawkish Federal Reserve policy coming. Intuitive will collect more interest revenue as rates rise rather than pay more like a company that requires debt financing.

Much of the success is due to the business model that creates recurring revenues. Rather than making the majority of its money on device sales, Intuitive makes 70% of its revenue on services and disposable parts. This is extremely important as the market becomes saturated with the da Vinci machines. It also means that the company will make more money when more surgeries are completed.

Short-Term Headwinds

The number of non-emergency surgeries performed in the U.S. declines as hospitals fill with COVID-19 patients. This hurts Intuitive’s results in the short term because of the recurring revenue model discussed above. Unfortunately, the Omicron variant has proved to be highly contagious.

Still, the news is not all bad. For one, this is a short-term development. In the long term, our aging population will need more procedures than ever. Second, this has kept the share price lower so investors with a long-term horizon can accumulate shares at a favorable rate.

The stock currently trades nearly 14% off its post-split highs. The stock may go even lower as the stock market appears to be off to a wobbly start in 2022. However, this company is a long-term winner.

Wall Street’s Take

Turning to Wall Street, analysts have a Moderate Buy consensus rating on Intuitive Surgical. There are four Buys and seven Hold ratings on the stock. There are no sell ratings. The average Intuitive Surgical price target is $362.80, implying 13.5% upside potential.

The Verdict on Intuitive Surgical

Intuitive Surgical continues its streak of impressive results in Q3 2021. Revenues were up 30% year-over-year, and margins remained extremely strong.

The company also added to its large stockpile of cash and investments, which stands at 7% of its market cap. Short-term headwinds persist and may cause the company’s results to suffer slightly. However, the secular bull case remains intact for long-term investors.

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