da Vinci 5 In Focus As Intuitive Surgical Reports Its Q2

Intuitive Surgical (NASDAQ: ISRG) will report its Q2 2024 results on Thursday, July 18. We expect the company’s revenues to come in at $2 billion and adjusted earnings to be $1.55 per share, broadly aligning with the consensus estimate. The company should continue to benefit from an overall growth in procedure volume and more placements of its new da Vinci 5 surgical platform. See our interactive dashboard analysis on Intuitive Surgical Earnings Preview for more details on the company’s revenues and earnings for the quarter. So, what are some of the trends that are likely to drive Intuitive Surgical’s results?

Firstly, let us look at Intuitive Surgical’s stock performance in recent years. ISRG stock has seen strong gains of 60% moving from levels of $275 in early January 2021 to around $440 now, vs. an increase of about 50% for the S&P 500 over this roughly three-year period. However, the increase in ISRG stock has been far from consistent. Returns for the stock were 32% in 2021, -26% in 2022, and 27% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that ISRG underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ISRG face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? Going by our Intuitive Surgical Valuation of $394 per share, it is seemingly fully valued.

Looking at the previous quarter, Intuitive Surgical’s revenue of $1.89 billion reflected an 11% y-o-y growth driven by a 16% rise in worldwide da Vinci procedure volume. The company placed 313 da Vinci systems during the quarter, similar to what it placed in the prior-year quarter. However, its total installed base increased 14% since March 2023. Intuitive Surgical secured the U.S. FDA approval of its next-generation platform — da Vinci 5 – in March 2024. It placed eight of its new systems during the quarter. The company’s operating margin expanded around 200 bps to 24.8% in Q1. The company’s bottom line stood at $1.50 on an adjusted basis, reflecting a 22% increase over the prior-year quarter.

Coming to the latest quarter, Intuitive Surgical likely benefited from placing more systems and da Vinci procedure volume growth. The company continues to expand its installed base, which results in the growth of recurring revenues, such as consumables. The company has projected global da Vinci procedure volume growth to be 14%-17% in 2024.

Overall, we think Intuitive Surgical will navigate well in Q2. However, we think the run-up in the stock (up 30% year to date) on the back of investor optimism surrounding the da Vinci 5 platform, hasn’t left much room for growth in the near-term. ISRG stock now trades at 21x trailing revenues, versus an 18x average P/S ratio over the last three years. ISRG has enjoyed a higher valuation multiple given its solid fundamentals and robust financial position.