Why Is Intuitive Surgical Stock Up 80%?

Intuitive Surgical (NASDAQ: ISRG) has seen solid gains of over 80% from levels of around $270 in early January 2021 to nearly $500 now, vs. an increase of about 50% for the S&P 500 over this period. This can primarily be attributed to a 74% rise in the company’s revenues to $7.6 billion now, versus $4.4 billion in 2020. Its P/S ratio has also improved marginally from 22x to 23x over this period. Intuitive Surgical has enjoyed lofty valuation multiples, given its strong top-line and bottom-line growth.

Looking at stock returns, ISRG was up 32% in 2021, it fell by 26% in 2022, and rose 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. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has been able to buck this trend and 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 higher levels? We think ISRG stock is fairly priced now. We estimate Intuitive Surgical’s Valuation to be $462 per share – below its current market price of around $490. Our forecast is based on 20x revenues, aligning with the stock’s average P/S ratio over the last four years.

Intuitive Surgical’s revenue rose 74% from $4.4 billion in 2020 to $7.6 billion in the last twelve months. Intuitive Surgical manufactures and sells robotic surgical systems. Its primary device is the da Vinci Surgical System, which helps surgeons perform minimally invasive surgeries through directions from a console. It delivers better postoperative results relative to traditional open surgery. It also sells self-manufactured instruments and accessories, a set of devices that enhance the functionality of da Vinci Surgical Systems. Additionally, it offers service contracts which include system service and customer training.

Intuitive Surgical has seen its installed base rise 54% from 5,989 units in 2020 to 9,203 units now. This has bolstered the company’s top-line growth in recent years. Now, Intuitive Surgical reports its sales under three segments: da Vinci Surgical Systems, Instruments & Accessories, and Services. These segments accounted for 24%, 60%, and 16% of the total sales in 2023, respectively. Our dashboard on Intuitive Surgical Revenue: How Does PM Make Money has more details.

Instruments & Accessories is the largest business for the company with recurring revenues from procedures performed. As such, the higher the installed base and number of procedures performed, it will bode well for the Instruments & Accessories business. The contribution of this segment to the company’s total sales has increased from 56% in 2020 to 60% now, and we forecast it to rise to 63% in the next three years.

Not only has the company seen strong revenue growth in recent years its operating profit margin has also improved to 25.8% now versus 24.1% in 2020. Notably, Instruments & Accessories is a high-margin business for Intuitive Surgical, and with its contribution to overall sales rising in coming years, the company will likely see an even better margin profile.

Overall, Intuitive Surgical is on a path to deliver strong sales growth in the coming years, driven by a mix of increased installed base and higher sales for its instruments and accessories. The company’s latest da Vinci 5 platform was launched in the U.S. earlier this year, and it will likely bolster the overall sales growth. However, most of these positives are likely priced in. We think investors will be better off waiting for a dip to pick ISRG stock for robust gains in the long run.

While ISRG stock appears appropriately priced, it is helpful to see how Intuitive Surgical’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/3/2024
[2] Cumulative total returns since the end of 2016

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