Intuitive Surgical: Great Results, but Still Pricey

Intuitive Surgical (ISRG), the leader in minimally invasive surgery, recently reported its Q3-2021 results, with numbers coming in quite strong.

I had recently discussed Intuitive Surgical in a previous article, praising the company’s extraordinary qualities but warning against the stock’s expanded valuation. In this article, we revisit Intuitive’s investment case based on its most recent report. (See ISRG stock charts on TipRanks)

Recent Developments

Intuitive Surgical Q3 results displayed solid improvements across the board. The company had been cramped by the decline in hospital procedures as a result of COVID-19 overwhelming hospitals last year. With the pandemic easing, Intuitive’s financials started to accelerate again. The company reported $1.4 billion in revenues, 30% higher year-over-year.

Worldwide da Vinci procedures increased approximately 20% vs. Q3-2020, reflecting hospitals’ ability to accommodate increased surgery volumes compared to the prior-year period. The CAGR (compound annual growth rate) between Q3-2019 and Q3-2021 now stands at 13%, which provides a good idea in terms of the organic growth in procedures, if we are to normalize the pandemic’s impact on the company.

Intuitive shipped 336 da Vinci Surgical Systems during the quarter, an expansion of 72% compared with 195 in the prior-year period. With more installed systems, Intuitive’s reach is constantly improving. More doctors are being trained to use the system, more minimally invasive procedures take place, and Intuitive’s popularity and creditworthiness among hospitals and medical personnel keep growing. Specifically, Intuitive’s da Vinci Surgical System installed base now numbers 6,525 systems, a growth of 11% compared with 5,865 systems at the end of Q3-2020.

With the company scaling successfully, its profitability and overall margins have been moving higher by the quarter. Gross margins returned to their pre-pandemic levels, at around 70%, while the company achieved net income of $381 million, or EPS of $1.04. This compares with $314 million, or $0.87 per diluted share, in Q3-2020.

The company also recently completed the three-for-one split of its common stock, which, while lacking any direct impact on Intuitive’s financials, should signal confidence amongst investors.

Does the Stock Remain Expensive?

While Intuitive Surgical’s recent results once again solidified the company’s bullish case, shares remain a bit pricey. Based on analysts’ estimates, Intuitive is expected to deliver EPS of $4.95 for the year. This implies a (forward) P/E of 69.04 at the stock’s current price levels. In my view, while the company is clearly a leader in the space, which should continue to dominate in minimally invasive surgeries, this makes for quite a premium.

Remember that the company has never paid dividends and has not stated any intentions of doing so. Hence, investors should expect to realize returns only in the form of capital gains, at least in the medium-term. Due to the lack of dividends to enhance one’s margin of safety at the stock’s current valuation levels, I am neutral on Intuitive Surgical. That said, the company remains a AAA player in the healthcare sector, and the stock could be considered a Strong Buy if its price were to decline by around 20%, in my opinion.

Wall Street’s Take

Turning to Wall Street, Intuitive Surgical has a Moderate Buy consensus rating, based on 4 Buys, 8 Holds, and zero Sells assigned in the past three months. At $354.42, the average Intuitive Surgical price target implies 3.8% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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