Can Intuitive Surgical Stock Go 10x?

We believe Intuitive Surgical (NASDAQ: ISRG) stock is positioned to grow its value nearly 10x in the long run as its robotic surgical business revolutionizes the healthcare sector – tracing a trajectory similar to what AI posterchild Nvidia’s stock has witnessed over recent years (Buy, Sell, or Hold Nvidia Stock?). Here’s why.

Fact: Intuitive Surgical has grown the annual number of procedures performed 5x from around 500k to 2.3 million in the last ten years.

ISRG product is compelling — and proven for the market

Case in point: More than 300 million surgeries are performed each year globally. So if robotic systems can capture even half of that market, that would mean 150 million annual surgeries. That’s over 60 times where ISRG is today. There have been reports stating the increased usage of robotic platforms in surgeries. For some hospitals, this number is already above 15%.

Why is that?

• Reduced errors: With the aid of a robotic system, human error during surgeries can be minimized.
• Reduced complications: Since the surgeries are minimally invasive, the device helps reduce surgical complications.
• Faster recovery: It makes the recovery process post-surgery easier and fewer scars.

Success breeds success. The advantages associated with minimally invasive surgeries are likely to lure more patients into opting for such procedures over traditional open surgeries.

Now, each robotic surgical system on average performs around 250 surgeries per year. So 150 million annual robotic surgeries will require roughly 600,000 robotic surgery platforms. Using Intuitive Surgical’s revenues as a reference point and ignoring the one-time sales revenue for a unit, each robotic surgery unit generates roughly $530,000 in instruments and accessories revenues and an additional $130,000 in servicing revenues each year. We are looking at an annual recurring revenue of around $660,000 per unit. So, 600,000 units can generate over $350 billion in recurring revenues each year.

But wait, aren’t other players working on robotic surgical platforms?

Yes, but not all of them are making the same progress. ISRG is way ahead in the market. Its main competitor, Medtronic’s Hugo, is yet to secure the U.S. FDA approval. Johnson & Johnson is yet to begin clinical trials for its robotic surgery platform — Ottava. There are other relatively smaller players, such as Asensus Surgical and Stryker, among others.

Intuitive Surgical’s latest platform – da Vinci 5 – is already approved by the U.S. FDA. For hospitals, it would make sense to stick with Intuitive Surgical, given that the surgeons are trained to use this platform. Hospitals will have to incur additional costs to train their surgeons if they switch to a new platform. Furthermore, Intuitive Surgical’s da Vinci 5 is more versatile and can perform various surgeries, including Gynecological, Urological, Bariatric, Colorectal, Thoracic, Cardiac, and General surgeries.

The best part?

ISRG enjoys a high gross margin of close to 70% and net margins of around 30%. With an increased installed base, and growth in recurring revenue, the margins could improve further.

If ISRG can capture about half of the global robotic surgery volume, it could generate annual revenues of around $175 billion. With a 32% net margin, that’s a neat $55 billion in profits. What’s that worth? At a 30x earnings multiple, that would imply an increase in Intuitive Surgical’s Valuation by about $1.6 trillion — implying a 10x jump from the company’s current stock price of around $500 to nearly $5,000.

To be sure, building this sort of scale can take a good deal of time. However, investors will need to look well out into the future. Think 2035, maybe even more — this is a buy-and-hold play with tons of long-term growth in store, with possibly large near-term fluctuations! The bottom line: Intuitive Surgical is growing robotic surgeries quickly, has the technology, regulatory approvals, and competitive edge, and is addressing a potentially massive market, making this high valuation within reach.

ISRG stock is up over 50% this year. However, the increase in ISRG stock over the last three-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 32% in 2021, -26% in 2022, and 27% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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.

[1] Returns as of 10/24/2024
[2] Cumulative total returns since the end of 2016

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