Intuitive Surgical’s Stock Price Growth Is Justified, But May Be Overdone

Intuitive Surgical‘s (NASDAQ:ISRG) stock has jumped more than 2x in the last couple of years, and the year 2017 has been especially strong. While we think that the fundamentals justify the stock surge in large part, the current price level may be unsustainable. Take a look at our interactive breakdown of Intuitive Surgical’s business historicals for more details. Our price estimate for Intuitive Surgical stands at $314, which is below the current market price.

Intuitive’s Stock Run-Up Is Justfied Because Of Strong Growth In Revenue and EBITDA

Intuitive Surgical’s stock rally can be attributed to strong growth in its revenue and EBITDA, which have grown at a CAGR of nearly 15% and 14%, respectively, between 2009 and 2017 (2017 figures estimated). This was driven by a sharp increase in the da Vinci installed based and the number of procedures performed using da Vinci surgical systems jumping from 205K to 850K.

Higher Installed Base Led To Growth In Recurring Revenue

As the da Vinci installed based increased from 1,395 to 4,370, recurring revenue became a greater part of the company’s business. Instruments and accessories revenue grew at CAGR of more than 17%, and revenue from services grew at over 16%. These sources of revenue accounted for roughly 48% of Intuitive Surgical’s overall sales in 2009. For 2017, we estimate that the figure will reach 72%, thus making the business even more attractive and less risky.

However, Pricing Declines, Competitive Threats Make Current Valuation Look Rich

However, there are a few reasons we believe the current stock price is now fairly steep. First, the expected growth rate doesn’t justify the high P/E ratio of 50 . Second, the average revenue per da Vinci unit shipped is declining, and the revenue from unit sales has been a little volatile. This is likely to continue. Also, the growth in the number of procedures, though still strong, has slightly declined this year in each subsequent quarter. Third, investors need to consider the competitive threat from TransEnterix, Medtronic, Verb Surgical and Titan Medical. TransEnterix’s surgical system recent received FDA approval. While the company currently has very little competition in its space, that is likely to change soon.

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