When it comes to the world of robotic surgery, there’s one company that stands head and shoulders above the rest — Intuitive Surgical (NYSE:ISRG). While giants like Medtronic (NYSE:MDT) and Stryker (NYSE:SYK) have dabbled in robotics through their subsidiaries, none can match Intuitive Surgical’s mastery of the field.
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With more hospitals across the world adopting Intuitive’s systems as a growing number of patients prefer minimally-invasive procedures, the company’s installed base continues to grow rapidly. Consequently, revenues and profits have been snowballing.
That said, even following the stock’s correction from its 2021 highs, Intuitive Surgical appears to be trading at a steep premium. Therefore, future shareholder returns could be limited. For this reason, I am neutral on the stock.
In this article, I will:
- Discuss Intuitive’s growing results via increased robotics adoption
- Assess the effectiveness of its capital returns
- Examine whether its investment case is worth considering
Increased Robotics Adoption Driving Revenues, Profits Higher
The increasing adoption of robotic-assisted surgeries has been a boon for Intuitive. Not only are more and more patients opting for minimally-invasive procedures over traditional surgery, but hospitals are also eager to embrace this trend. Why? Because it can mean higher surgical revenues and a reduction in expenses as a result of lower complication rates and shorter patient stays.
With the potential to offer additional services and instruments that further support its growth, Intuitive has certainly seized this opportunity. Specifically, Intuitive’s revenues and EBITDA have grown at a 10-year CAGR of 11% and 7.7%.
Intuitive had another standout year in Fiscal 2022, with impressive results that reflect the company’s strong position in the market. Although the number of new da Vinci system installations was down by 6% compared to the previous year, this is hardly a cause for concern.
With more and more systems already in use around the world, it’s only natural that the number of potential new customers decreases. What’s really worth celebrating is the company’s recurring revenues, which are a testament to the ongoing use and effectiveness of the da Vinci systems.
In fact, recurring revenues made up a whopping 79% of total revenues for the year and grew by an impressive 15% compared to the previous fiscal year. Accordingly, total revenues for the year amounted to $6.2 billion, up 9% year-over-year.
Specifically, procedure growth for 2022 was 18%, bringing the three-year compound annual growth rate of procedures to 15%, clearly illustrating the growing demand for minimally-invasive procedures over traditional ones. International markets continue to be Intuitive’s stronger revenue growth driver, with procedures growth of 22% versus domestic growth of 16%.
However, net income declined by 22.3% to $1.32 billion for the year. Still, this was only due to operating expenses growing by 23% because of Intuitive’s strategy to advance its platform capabilities and digital products, expand into markets outside of the U.S., and support regulatory clearances and clinical trials. Net income should resume its growth this year in the absence of such special items.
Does Intuitive Surgical’s Capital Return Strategy Make Sense?
With Intuitive’s revenues and profits gradually advancing, the company has employed a straightforward capital return strategy – that of repurchasing its own stock. Last year, the company repurchased $2.8 billion worth of shares.
This amount was much larger than its underlying profits, but with its net cash position standing tall ($4 billion at the end of Fiscal 2022) and the stock trading lower from its October 2021 highs, it likely felt like a decent opportunity to do so.
However, it’s debatable whether the company’s capital return strategy makes sense, in my view. As I mentioned earlier, despite Intuitive’s correcting over the past year, it’s still trading at a premium valuation. For instance, the stock’s forward P/E currently stands at about 45.
The $2.8 billion worth of stock repurchased was able to reduce the company’s share count by just 1.7%, which indicates that management could be overpaying for its own stock at its current valuation levels.
Is ISRG Stock a Buy, According to Analysts?
Turning to Wall Street, Intuitive Surgical has a Strong Buy consensus rating based on 12 Buys and four Holds assigned in the past three months. At $276.94, the average Intuitive Surgical stock forecast implies 17.9% upside potential.
Is Intuitive Surgical’s Investment Case Worth Considering?
Intuitive Surgical’s investment case can be polarizing. On the one hand, it dominates the robotic-assisted surgery industry with an ever-growing number of installed systems. As demand for minimally-invasive procedures continues to rise, recurring revenues from procedures and services are poised for sustained growth. And let’s not forget that ISRG’s balance sheet boasts $0 of long-term debt, a rare and attractive characteristic in today’s rising-rate environment.
But on the other hand, it’s hard to ignore the potential risks of the company’s current valuation levels. Despite analysts projecting mid-teens earnings-per-share growth over the medium term, the stock appears quite expensive at a forward P/E of 45.
Plus, if Intuitive chooses to reinvest its growing revenues into future capabilities, as it did in Fiscal 2022, net income growth may lag, and shares could experience a significant valuation multiple compression. This scenario would only worsen things for Intuitive, as it would confirm that the company overpaid for the stock it recently repurchased. Hence, investors who require a notable margin of safety should most likely stay on the sidelines for the time being.
