Can Intuitive Surgical Fall Below $400?

Despite a 16% decline in Intuitive Surgical’s (NASDAQ:ISRG) stock since the beginning of the year, at the current price of around $500, we believe Intuitive Surgical’s stock hasn’t bottomed out yet. Why is that? The potential downside to Intuitive Surgical’s stock can be attributed to the fact that it is currently a good 37% ahead of the $365 figure seen in Jan 2018. Our dashboard, ‘Intuitive Surgical Downside: How Low Can Intuitive Surgical Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

A significant contributor to the stock growth of the last 2 years was Intuitive Surgical’s revenue and EPS, which grew over 40% each. Also, the company’s P/E ratio, on a trailing basis, grew from about 40x at the end of 2017 to over 46x at the end of 2019. All of the above three factors could see a decline in the near term. Intuitive Surgical’s total procedures were down 9% sequentially in Q1, and the trend is only going to worsen in Q2, as the situation on the ground has drastically changed since the end of March, with the outbreak of COVID-19 outside of China to the rest of the world, primarily the U.S. becoming the epicenter of the crisis. We believe Intuitive Surgical, in line with other medical devices companies, will likely face a challenging 2020.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have some impact on Intuitive Surgical’s business, due to an overall decline in the total procedures performed. Intuitive Surgical primarily serves the robotic surgical systems market. Its primary device is the da Vinci Surgical System, which helps surgeons perform minimally invasive surgeries through directions from a console. Now given the COVID-19 pandemic, there is a shortage of medical staff and hospital facilities for treatments other than related to coronavirus. Given the restrictions on movement of people across the globe, several elective procedures will likely be canceled or postponed. This will directly impact Intuitive Surgical’s sales.

Though Intuitive Surgical will be quick to bounce back and see growth in procedures, as the coronavirus crisis winds down, there are uncertainties around its timeline. This can be attributed to unavailability of a cure or vaccine for the treatment of COVID-19. While there are several pharmaceutical companies working to develop vaccines for COVID-19, it could take 10-12 months for them to be commercially available. Also, Intuitive Surgical’s business segments are all inter-related. A growth in da Vinci systems sales results in a higher installed base for the company, which in turn, drives the Instruments & Accessories and Services segments revenue, and none of its segments are immune to the current crisis.

As such, we consider a scenario for 2020, with investors revising their expectations for the full-year revenue to be closer to $4.0 billion, about 27.5% higher than its 2017 revenue of $3.2 billion, and 11% lower than the 2019 revenue of $4.5 billion. The market isn’t going to stomach this well, and Intuitive Surgical’s P/E multiple is likely to shrink 20% from the 46x level seen toward the end of 2019 to 37x. This would mean a double whammy of 24% lower earnings and a 20% lower P/E multiple, translating into Intuitive Surgical’s price drop of 28%, to about $360 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

The situation is comparatively better for pharmaceutical companies, such as Merck, which appears to be oversold at the current levels.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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