Why We’re Revising Our Price Estimate For Intuitive Surgical To $687?

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Intuitive Surgical

We recently increased our price estimate for Intuitive Surgical (NYSE:ISRG) by approximately 20%, to $687. The revision in our price estimate for Intuitive is mainly because we believe that the company will manage to sell a higher number that we previously believed of daVinci systems and have lesser number of trade-in transactions going forward. Below we detail the key reasons as to why we increased our price estimates:

A) Upward Revision In The Number of daVinci Systems Sold Forecast: Driven by an increase in the number of procedures worldwide, Intuitive is seeing strong adoption of its daVinci systems globally. This growth is driven by: 1) the strong adoption of daVinci Xi Systems in the U.S.; 2) growth in the use of daVinci Systems outside the U.S.; and, 3) the increased adoption of daVinci Systems beyond its standard usage in cardiac and gynecologic surgical applications. Further, we believe that robotic surgery is in its infancy and there remains ample growth opportunity for Intuitive going ahead, as it expands the range of procedures offered through the daVinci systems and grows its reach to other regions internationally.

On account of cost-efficacy concerns of robotic surgery, we previously expected Intuitive’s average installed base of daVinci systems to increase from 3,477 in 2015 to 3,729 in 2016, which is an increase of approximately 7%. However, given that the company installed base has already reached 3,745 by the end of Q2’16, it is clear that these concerns are subsiding and it is witnessing strong demand for its systems. Hence, we have revised our estimates of the average installed base as below:

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Note: Average installed base is dependent upon units sold and trade-in transactions

B) Downward Revision In The Number of  Trade-In Transactions Forecasts: Intuitive allows its customers to trade-in their older systems for credit towards the purchase of a newer generation system. As a part of a trade-in transaction, the customer receives a new generation system in exchange for its older used system. According to our estimates, 57% of the 492 systems units of da Vinci systems sold by Intuitive in 2015 were a part of trade-in transaction. We calculate the trade-in of the systems in a given year (Y) by adding the number of systems sold to the prior year tally to the installed base of the prior year, and then subtracting the year-end installed base.  (That is, prior year installed base plus number of systems sold, less current year installed base.)

Given the fact that Intuitive Surgical is now aggressively expanding into international markets, it is likely to witnesses a higher number of new systems being installed and a lower number of trade-in of existing systems. Also, given that it has been a while since Intuitive launched its daVinci Xi systems, the proportion of upgrades to this model coming from trade-in transactions might well decrease.

Trade_in_price_revision

c) Improved Cash Position: With the strong adoption of Intuitive’s daVinci systems in various surgical applications, the company has seen a significant rise in the number of procedures globally. This has resulted in increased orders for daVinci systems and a rise in the recurring revenues. This has helped Intuitive to enhance its cash position, which further pushed up our price estimate for the company. Intuitive’s cash and cash equivalents plus short and long-term investments has increased from $3.3 billion in December 2015 to $4.2 billion in June 2016.

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