Intuitive Surgical (NASDAQ:ISRG) is the innovative medical tech business behind the well-known da Vinci line of surgical robots. A leader in the robotic surgery field for many years, Intuitive Surgical delivered strong returns throughout the late 2010s and early 2020s as technology improved and interest in medical robotics surged. During the past year, however, ISRG has gone down by about 14 percent, calling into question whether the stock could be running out of fuel. What does the future look like for Intuitive Surgical, and where will ISRG stock be in five more years?
Diving Into Intuitive Surgical’s 20 Straight Quarters
Although the stock has lost ground over the past year, Intuitive Surgical has managed to deliver 20 consecutive quarters of revenue growth and 11 of earnings growth. The most recent report for Q4 detailed overall revenue growth of 19 percent to $2.87 billion. During the quarter, Intuitive placed over 500 new da Vinci systems, bringing the total installed base to over 11,100.
Turning to profitability, Intuitive’s Q4 GAAP net income was $795 million, representing a net margin of 27.7 percent. Compared to the year-ago quarter, net income was up nearly 16 percent. Intuitive has also managed to deliver respectable returns on both equity and invested capital, both at 16.6 percent over the last 12 months.
Another appealing aspect of Intuitive Surgical’s performance is the growth of its service and instrument revenues as the base of da Vinci systems in use expands. Q4 saw service revenue of $422 million, up 21.5 percent from the year-ago quarter. Sales of instruments and accessories, meanwhile, were the largest contributor to total revenue at $1.66 billion. These revenue streams create sustained recurring revenue for Intuitive on the back end of its da Vinci sales, allowing its revenues to snowball as it deploys new systems.
How Much Will Intuitive Grow in the Next 5 Years?
Intuitive Surgical could be in a position to see sustained high growth rates over the next half-decade and beyond as robotic surgeries, aided by advances in AI technology, become increasingly common. Although Intuitive is apt to face growing competition over the next five years as other businesses race to deploy their own robotic surgery systems, Intuitive Surgical held an estimated 60 percent share of the global robotic surgery market going into 2025.
That market is expected to expand at a CAGR of about 16.5 percent through 2035, more than doubling to about $34.6 billion by 2031 and eventually ending up at over $63 billion by the middle of the next decade. If Intuitive Surgical can retain its market dominance, this could set it up for sustained growth not only through the next five years but also for the five years after that.
Much of Intuitive’s performance over the coming several years will depend on the success of its da Vinci 5 system. Equipped with cutting-edge computer vision technology and a plethora of new design features, the da Vinci 5 is being billed as a solution for improving efficiency, patient outcomes and ease of use. The system could both drive growth in the installed da Vinci base and gradually replace older models.
Geographic expansion could be another driver of growth in the coming several years. Although North America is currently the largest robotic surgery market, the Asia Pacific market is expected to see the highest growth rates over the next 10 years.
Cumulatively, analysts expect these growth trends to send ISRG’s earnings per share up at an annual rate of about 15.7 percent through the next five years. Considering the strong growth that the global robotic surgery market is expected to deliver throughout the next decade, it’s likely that earnings could maintain a double-digit CAGR well beyond the 5-year mark.
ISRG Trading at 66x Earnings
One of the factors that has worked against ISRG over the last year has been its high valuation. Even after falling by a decent amount, shares of Intuitive Surgical still trade at about 66.7 times trailing 12-month earnings and 19.0 times sales. At the average target price of $608.26 projected by analysts, however, ISRG would still rise by another 15.7 percent from its most recent price of $525.81.
On a discounted cash flow basis, ISRG could be overvalued compared to its 5-year potential for growth. As such, investors appear to be pricing in many years of substantial growth as the robotic surgery market expands and da Vinci’s base of installed systems builds instrument and service revenues. Though Intuitive could justify this premium price tag, it does seem that several optimistic long-term assumptions are already baked into ISRG at its current price.
Where Will ISRG Be Five Years From Now?
As much as earnings growth, ISRG’s price over the next five years seems to depend on the market’s willingness to keep the stock at high P/E and P/S ratios. If Intuitive maintains the EPS growth rate expected by analysts for the next five years, its earnings would end up at a little over $16.30 per share.
At that level of earnings, though, the stock could still trade at a P/E of over 30 and actively lose ground over the next five years. In order to keep pace with the roughly 10 percent annualized returns investors typically expect from the S&P 500, ISRG would either have to substantially beat out earnings growth estimates or maintain a P/E of over 50.
None of this is to say, however, that ISRG won’t appreciate over the next five years. Rather, it seems likely that the stock’s returns could be hampered by the high levels of growth that are already priced in. Even accounting for some share compression in its valuation, it’s far from difficult to envision ISRG reaching the low to mid-$700s as its earnings continue to rise.
As a business, Intuitive Surgical remains an appealing play on the growth of robotic surgery, especially with that market expected to see an upcoming decade of double-digit expansion. ISRG, therefore, may be a good stock to hold over the next five years, but it may also be too expensive to actively buy today. Owing to its appealing qualities as a business investors may want to keep an eye on Intuitive Surgical for buying opportunities at more appealing prices.
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.