Intuitive Surgical Stock Is Richly Valued At $900 Levels

by Trefis Team
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We believe that the stock price of Intuitive Surgical (NASDAQ: ISRG) appears fully valued at the current levels of around $900, and it is vulnerable to downside risk. ISRG stock is up 2.5x from the levels of around $367 it was at on March 23, 2020, when broader markets made a bottom. This marks a significant outperformance compared to the S&P 500, which is up 91% over the same period. The outperformance of ISRG stock can partly be attributed to upbeat results over the recent quarters, led by a rebound in procedures volume.

Looking at a longer time period, ISRG stock is up 90% from the levels of around $480 seen toward the end of 2018 (vs. an S&P 500 rise of around 70%). Much of the 90% rise in ISRG stock over the last two years or so can be attributed to favorable changes in the company’s P/E multiple. Looking at the fundamentals, the company’s total revenue grew 24% to $4.6 billion over the last twelve month period, compared to $3.7 billion in 2018. The revenue rise can largely be attributed to a higher number of system placements, which, in turn, generated higher recurring revenue from consumables and services for the company. However, the company’s net margins declined 590 bps to 24.4% over the last twelve months, compared to 30.3% in 2018. This can be attributed to lower sales and increased operating costs in 2020, due to the impact of the pandemic. The company saw a 4% rise in total shares outstanding due to share issuances.

As such, on a per share basis, Intuitive Surgical’s earnings grew less than 1% to $9.98 for the last twelve month period, compared to $9.92 in 2018. Despite only a modest rise in EPS over the recent years, Intuitive Surgical’s P/E multiple has expanded a large 108% to 100x currently, compared to levels of around 50x seen in 2018. Our dashboard, ‘What Factors Drove 90% Change In Intuitive Surgical Stock between 2018 and now?‘, has the underlying numbers.

Outlook

While the Covid-19 pandemic weighed on the company’s performance over the past few quarters, the opening up of economies would mean a rebound in volume of procedures performed, boding well for ISRG stock. The company reported an 18% y-o-y growth in its top-line to $1.3 billion in Q1 2021. This can be attributed to higher demand for consumables as well as higher services revenue. Intuitive Surgical’s earnings grew 31% y-o-y to $3.52 on an adjusted basis, led by growth in revenues as well as margin expansion, a trend expected to continue in the near term.

That said, ISRG stock does appear to be richly valued now. At the current levels of over $900, ISRG stock is trading at 67x its forward estimated adjusted EPS of $13.50 in 2021, compared to levels of around 60x seen in 2019 and 2020, and levels of under 40x seen prior to 2019. This means that the P/E multiple for ISRG stock is much higher than its historical levels, and the stock is vulnerable to some downside risk, in our view.

Furthermore, another medical devices company – Medtronic – launched its robotic assisted surgical system, Hugo, last year. Hugo allows the surgeon to control up to four independent robotic arms during the procedure from one console, and it can easily be moved within a hospital, unlike Intuitive Surgical’s da Vinci systems, which are immovable once fixed. We know that Medtronic has a long road ahead to catch up to Intuitive Surgical, given that the latter already has over 6,000 robotic surgical systems placed globally. However, Hugo is also likely to see some demand, implying an increased competition for Intuitive Surgical, and a likely decline in the high multiple that Intuitive Surgical has enjoyed thus far.

Although ISRG is a high-quality stock to invest in, given the company’s business model, which ensures recurring revenues from consumables on each installed device, and that the robotic-assisted surgery market will be large enough over the coming years for multiple players to thrive, based on the current valuation, we believe that it will be prudent for investors to wait for a better entry point in ISRG stock to buy for higher gains.

While ISRG stock may see lower levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for ICU Medical vs Abbott.

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