Intuitive Surgical (NASDAQ:ISRG) is the maker of the well-known da Vinci line of surgical robots. Though the business is still expanding well and delivering respectable profitability to its shareholders, ISRG stock is down more than 10 percent in the past year and almost 14 percent in the last three months.
Is Intuitive Surgical stock finally undervalued, and could now be the time to buy the robotic surgery startup for long-term gains?
ISRG Still Trading at Sky High Earnings
At first glance, ISRG’s valuation metrics don’t exactly suggest that the stock is undervalued. Intuitive Surgical, even after losing a substantial part of its value, still trades at 61.2 times earnings, 17.5 times sales and 80.0 times operating cash flow. Even the price-to-earnings growth ratio for ISRG is quite high at 2.6 times expected 5-year growth.
Analysts, however, still see market-beating upside in Intuitive Surgical. The consensus price target for ISRG shares currently stands at $582.10, representing a gain of over 32 percent from the most recent trading price of $438.72. The stock has a fairly strong consensus buy rating, with 15 buy ratings, 8 hold ratings and only one sell rating.
It’s also important to recognize that today’s valuation is actually somewhat low for ISRG. On trailing 12-month earnings, for instance, this is about the cheapest Intuitive Surgical has been since late 2022. A similar trend holds true when it comes to the P/S ratio, which is now well below what it has averaged since the end of 2023.
Tying all of this together, it’s clear that Intuitive Surgical is still priced at a premium on expectations of strong long-term growth. The premium the market is assigning it now, however, is a meaningful downgrade from where the stock has traded over the past couple of years.
Intuitive’s Sales Are In The Billions
Intuitive’s recent results offer a good view of why investors are still fairly bullish on ISRG’s potential, even if the stock’s price has cooled. In Q2, for instance, the business generated total revenues of $2.44 billion, up 21.4 percent from the $2.01 billion it reported a year earlier. The number of procedures performed using a da Vinci system worldwide grew 17 percent. 395 new da Vinci systems were also deployed, bringing the total installed base to 10,488.
In addition to revenue growth and ongoing expansion of its installed base, Intuitive delivered rather strong earnings growth last quarter. GAAP net income rose 24.9 percent to $658 million, translating to per-share earnings of $1.81. Net margin in the past 12 months has come in at 28.7 percent, complemented by a 16.0 percent return on invested capital.
The business also ended the quarter with an impressively strong balance sheet featuring total assets of $20.16 billion against total liabilities of just $2.21 billion. This left shareholders’ equity at $17.95 billion, and Intuitive has delivered an ROE of 16.0 percent over the trailing 12-month period.
Given Intuitive’s lack of long-term debt and $9.53 billion in cash, cash equivalents and investments, the business is in a very good position to invest in future growth initiatives or return cash to shareholders via buybacks. Speaking of buybacks, management expanded its buyback authorization to $4 billion earlier this year.
Intuitive Surgical’s Long-term Growth Thesis
Much of Intuitive’s valuation rests on its ability to sustain high levels of growth going forward. To a large degree, the business is already positioning itself for that growth by focusing on building its base of installed devices while also pursuing expansion into new markets.
In Q2 alone, Intuitive received limited European certification for its latest da Vinci 5 machine and broader approval for the machine’s use in Japan. By expanding globally, Intuitive has strong potential to keep its growth up as medical demands keep rising in markets outside of North America.
Another significant growth driver, though perhaps a less certain one, is the potential for long-term growth in telesurgery. With the ability for surgeons to work remotely through surgical robots, it’s becoming increasingly possible to eliminate geographical barriers between patients and their surgeons. Though this area of healthcare is still in its infancy, there’s undeniable potential for improvements in both cost and healthcare outcomes as a result of telesurgery.
Through 2030, the global telesurgery market is expected to grow at a CAGR of 16.1 percent to reach a size of just under $6 billion. Though this would see the market expand to roughly triple its current size by the end of the decade, $6 billion is still a modest amount by healthcare standards.
Looking beyond 2030, however, it’s quite possible to imagine telesurgery being used as an increasingly common solution to meeting surgical needs in underserved areas and making minor surgeries generally more efficient.
The potential for ongoing growth in robotic surgeries, coupled with Intuitive’s strong lead in the field, could set the business up for years of strong revenue and earnings expansion. Increasing the base of da Vinci machines also sets Intuitive up for expansion of its service revenue, creating a long-term stream of recurring revenue from its existing clients.
Is Intuitive Surgical Stock Undervalued?
While Intuitive Surgical does carry certain risks as an innovative, high-growth medical technology business, there’s quite a lot to like about it as a whole. Intuitive has already established a clear moat for itself in the robotic surgery marketplace and has demonstrated strong execution on its growth plans.
Moreover, Intuitive is already delivering attractive profitability and has a fortress balance sheet, both factors that make the business look even better for long-term investors.
All told, there’s a good chance that ISRG is moderately undervalued today. Though it trades at fairly high multiples to its current earnings and sales, the long-term potential for growth seems to justify a premium price tag. Intuitive Surgical may be a bit risky due to the high growth assumptions baked into its price, but investors looking for a chance of higher-than-average upside in the medical technology field may want to take a look at ISRG as a possible long-term buy-and-hold opportunity.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.