What Will It Take For Intuitive Surgical To Be A $1000 Stock?

Intuitive Surgical’s (NYSE:ISRG) stock has gained significantly since the company’s Q1 2017 earnings release. Analysts at Goldman Sachs and Wells Fargo recently upgraded their price targets for the stock to $1,000. The rationale revolves around increasing acceptance of robotic surgeries, growth in the number of procedures such as hernia repair and colorectal surgery, untapped potential in emerging markets and Intuitive’s competitive advantage. There is certainly a lot of merit to the arguments. But what does this imply for Intuitive’s expected business growth? You can leverage Trefis’ interactive platform to visualize what a $1000 stock price would indicate about the future sales of da Vinci systems and accessories. Assuming that Intuitive’s gross margins stay in the 70% range, the company will have to sell nearly 800 da Vinci systems annually by the end of 2023 and grow its average instrument/accessory spend per unit to nearly half a million dollars. This represents close to 45% growth in both metrics over a span of 6 years. Below we take a look at whether this is achievable.

Our price estimate of $791 for Intuitive Surgical is more than 10% below the market.

Considering that the growth in the number of procedures performed using da Vinci surgical systems accelerated to 18% in the first quarter of 2017, achieving 45% growth in key business drivers may be possible. However, we note that the average instrument/accessory spend per unit hasn’t moved much in the last few years. If this continues to be the case, Intuitive Surgical will have to sell well above 1000 units annually by 2023 to justify a $1000 stock price today, implying nearly 100% growth in the number units sold. Bear in mind that the average selling price for da Vinci units is close to $1.5 million and also involves significant investments in physician training, so it is not necessarily an “easy sell.” Additionally, considering that Intuitive’s performance has been mixed in China and Brazil, which are key growth markets, and more instruments are being placed under operating leases, we remain relatively cautious about Intuitive’s valuation.

On the plus side, the recent surge in the number of procedures was not just driven by mature categories such as urology and gynecology, but also the emerging category of general surgery. The company has observed strong surgeon interest and an encouraging utilization rate of da Vinci systems in general surgery. It plans to invest in a new technology upgrade – da Vinci X – over the next few quarters, contingent on regulatory approvals. The company hasn’t given much information on the price point at this time, but it appears that da Vinci adoption is likely to expand at a healthy rate. But whether it will expand at a rate that justifies $1000 price target remains to be seen.

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