Despite An 85% Rally Intuitive Surgical Stock Can Grow Further

Intuitive Surgical’s stock (NASDAQ: ISRG) lost more than 38% – dropping from $600 at the beginning of the year to below $370 in late March – then spiked 85% to around $680 now. That means it is well above the levels where it started the year.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually, which will bode well for Intuitive Surgical. In addition, the company posted better than expected Q2 results, led by continued expansion of its installed base of da Vinci systems.

But is this all there is to the story?

Not quite. Despite the recent rally, Trefis estimates Intuitive Surgical’s Valuation at about $749 per share, roughly 10% above the current market price based on a key opportunity and a risk.

The opportunity we see is to Intuitive Surgical’s Revenue growth over the coming years. With the economies gradually opening up and lockdown restrictions being lifted in several cities, the healthcare institutions have begun attending to elective surgeries, which were deferred earlier. This means a gradual increase in the number of procedures performed, which would be a positive for Intuitive Surgical. The company’s Q2 numbers also came in better than estimates, as the company managed to place 178 systems, which is 35% lower than last year Q2 placements, but better than estimates. Looking forward, the number of procedures performed over the next few quarters will likely be higher given a huge backlog for healthcare institutions to cater to. Looking beyond 2020, the company is poised to see strong growth for its systems sales, as more patients opt for robotic surgeries given its advantages, including fewer and smaller incisions, less blood loss, shorter hospital stays, faster  recoveries, and fewer scars than traditional open surgery.

While the company is expected to see a strong revenue and earnings growth in the medium to long run, there is a risk that stems from Intuitive Surgical’s valuation multiple compared to its own historical multiple. The stock now trades at 78x its average consensus 2020 earnings per share of about $8.70, while we estimate the EPS to be a little higher at $10.00, reflecting a 68x multiple at the current market price. Our valuation of $749 per share for Intuitive Surgical is based on 75x projected 2020 earnings, and the number appears to be much higher if we look at the company’s historical multiple of roughly 48x over the last few years. However, we are comfortable with such a valuation, primarily due to the growth outlook over the medium to long run. We know that 2020 earnings growth will be disrupted due to the impact of Covid-19, but as procedures growth gain momentum over the coming years, the projected earnings for 2022 could see growth as high as 50% from the levels in 2020, in our view. For comparison, Intuitive Surgical’s adjusted earnings grew 40% between 2017 and 2019.

But why such growth? There has been an increased demand for robotic platforms for surgeries over the last decade. For perspective less than 2% of the total procedures performed used robotic platforms in 2012, and that number surged to over 15% in 2018, according to a study. Intuitive Surgical is by far the leader in robotic surgical systems with an installed base of over 5,600 units. The installed base could grow 2.5x over the next 6-8 years with patients and physicians opting for robotic surgeries over traditional surgery. Investors are aware of the growth potential and that is why the stock is currently trading at such a high multiple. While we believe the multiple will decline over the coming years, the earnings growth will more than offset that decline resulting in a higher share price for Intuitive Surgical.

Given the current Covid-19 pandemic, several elective surgeries were postponed in the first half of the year, resulting in a 22% dip in the company’s sales in Q2. Despite that, the situation is changing on the ground with an increase in the number of procedures performed as the economies open up. The rebound in economic growth and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here. For Intuitive Surgical the key trend to watch out for will be the growth in Q3 procedures, as elective surgeries gain in number over the coming months.