Intuitive Surgical (ISRG), the world leader in robotic surgery, is likely to experience downside volatility over the next 12 months before long-term growth resumes. Recent strengths in earnings and free cash flow have significantly boosted market sentiment for the stock. While I am bracing for a potential near-term P/E ratio contraction, I remain bullish in the long-term. The company could achieve high growth if it successfully transitions to fully autonomous systems.
Intuitive Surgical Could Pioneer Automated Surgery
Intuitive Surgical has been a leader in robot-assisted surgery for nearly three decades, and has potential to deliver further advancements with AI. That is the foundation of my bullish rating. The company’s da Vinci Surgical System has set the standard for minimally invasive procedures. Most importantly, its high-definition 3D visualization and robotic arms reduce human error, improve patient outcomes, and shorten recovery times.
Intuitive Surgical has the potential to become the leader in automated surgery. While management has not made any public statements about taking this direction, it has laid the foundation. The company currently leverages AI for pre-surgical planning and offers virtual reality simulators on its Iris app.
That being said, there is a risk that the company could fail to adapt to automation trends effectively. Competitors—including Johnson & Johnson (JNJ) and Medtronic (MDT) could advance technology faster than Intuitive Surgical, potentially leapfrogging its position in robotics with automation. Therefore, this is both a time of opportunity and vulnerability, depending on management’s strategic decisions.
The Near-Term Price Momentum Likely Won’t Last
Although my long-term Buy thesis is supported by the company having excellent margins (a gross margin of nearly 67% and a net margin of nearly 28%) and no debt, ISRG stock’s recent strong momentum looks unsustainable. This is true even though the company has generated average revenue growth rate of 13.6% over the past 5 years and is expected to realize slightly higher growth of 14.75% for the next 12 months.
Management has achieved free cash flow growth, and along with year-over-year diluted EPS growth of 45.9% versus a five-year average of 15.1%, it’s no surprise investors have driven ISRG stock up over 60% in the past year. Despite the undeniably strong near-term growth, the medium-term future could prove more challenging.
Part of the reason for the strong upward revisions for Fiscal 2025 is that analysts are incorporating lower interest rates into their forecasts. Lower interest rates benefit the company because many of its customers rely on financing to purchase its systems. While I agree that further rate cuts are likely (following the 50 basis point cut from September), it could also have an inflationary effect. If we enter a recessionary period in a few years, Intuitive Surgical could suffer.
However, the company’s thoughtful recurring revenue model provides it with some economic resilience. This was on display during the COVID-19 pandemic when System sales declined by 12% in 2020, but Instrument sales grew by 2%. I expect this will be one of the most significant protective mechanisms preventing material downside in the event of a recession.
Short-Term Challenges with Long-Term Growth Potential
Counter to my Buy rating, Intuitive Surgical’s valuation ratios are currently suggesting significant expansion, with near-term volatility despite long-term growth prospects. ISRG stock’s non-GAAP P/E ratio is 22% higher than its five-year average. Additionally, its forward P/S ratio is 24% higher, while the forward estimated revenue growth rate is 8.7%. Overvaluation concerns are possible in the near term, despite my longer term optimism.
If the tailwinds from lower interest rates taper off in late 2025, fiscal 2026 could prove slower for Intuitive Surgical. The company’s non-GAAP P/E ratio could possibly contract to around 60x (its five-year average). This could translate into a stock price of approximately $460 within 12 to 18 months based on consensus EPS estimates.
However, my independent forecasting indicates that ISRG stock remains a viable long-term investment. The company could achieve a three-year normalized EPS CAGR of 15% and reach a normalized EPS of $10.13. If its non-GAAP P/E ratio contracts toward its five-year average of approximately 60x, the stock could still be worth $608, representing three-year share price CAGR of 8.2%.
As mentioned in my operational analysis, management could drive much higher growth rates over the long term if it successfully moves toward fully autonomous surgery.
Do Wall Street Analysts Rate IRSG Stock a Buy?
Based on Wall Street analysts, TipRanks currently slots Intuitive Surgical shares as a Moderate Buy based on 13 Buy ratings, five Hold ratings, and zero Sell ratings in the last three months.. The average ISRG price target of $498.88 is about 3.5% higher than the recent trading price.
Conclusion: Intuitive Surgical Is Still Worth Owning
Investing in robotics may offer one of the highest growth prospects since the Industrial Revolution. However, investors should note that there is no guarantee Intuitive Surgical will successfully navigate a pivot to autonomous systems. The company could be outcompeted. That said, I believe it is currently the best positioned firm to capitalize on the opportunity. Even facing a potential near-term contraction in its valuation, I expect strong long-term growth in shares over time.
