What’s Next For Intuitive Surgical Stock?

[Updated: Oct 22, 2021] ISRG Q3 Update

The stock price of Intuitive Surgical (NASDAQ: ISRG) has seen a rise of around 3% over the last five tradings days after it announced its Q3 results, which were above the street estimates. The company reported revenues of $1.4 billion, up 30% y-o-y, and it compares with our forecast of $1.3 billion and $1.4 billion consensus estimate. The revenue growth was driven by a better than anticipated uptick in procedure volume (up 20% y-o-y), driving the company’s instrument & accessories (I&A) revenues. Note that while I&A revenue grew 20% on volume growth, the average I&A revenue per procedure has actually declined slightly to $1,900 in Q3 2021, compared to $1,910 in prior-year quarter and $1,940 in Q2 2021, due to an increase in extended use instruments usage. Our dashboard on Intuitive Surgical Revenues offers more details on the company’s segments. The company lowered its upper end of the range of procedure volume growth for the full-year 2021 to 27%-29% from 27%-30% earlier, owing to the impact of the delta variant.

Looking at the bottom-line, adjusted EPS of $1.19 per share (up 29% y-o-y) was slightly below our forecast of $1.22 but better than $1.17 consensus estimate. This can be attributed to higher revenues as well as margin expansion. Furthermore, the company said it expects gross margins to be 71%-71.5% for the full-year 2021, narrowing from the earlier provided range of 70.5% to 71.5%.

We have now revised our Intuitive Surgical Valuation to $361 per share (vs. $345 earlier) based on revised adjusted EPS  forecast of $5.00 and a P/E multiple of 72x. This marks a small premium of around 6% from the current levels of $340 for ISRG.

While ISRG stock has some more room for growth, there are several peers in its sector that look like a better bet than Intuitive Surgical. Also, Intuitive Surgical Peer Comparison summarizes how the company fares against peers on metrics that matter.

[Updated: Oct 15, 2021] ISRG Q3 Earnings Preview

Intuitive Surgical (NASDAQ:ISRG), a fast growing robotic surgical platform company, is scheduled to report its Q3 2021 results on Tuesday, October 19. We expect Intuitive Surgical to likely to report mixed earnings with revenue slightly below and earnings to be above the consensus estimates. With the rise of the delta variant and Covid-19 cases in the U.S. over the last few months, it is likely that Intuitive Surgical’s sales were adversely impacted. That said, our forecast indicates that Intuitive Surgical’s valuation is around $345 per share, which is 6% above the current market price of $345, implying that ISRG stock still has some room for growth, in our view. Our interactive dashboard analysis on Intuitive Surgical Pre-Earnings has additional details.

(1) Revenues expected to fall short of the consensus estimate

Trefis estimates Intuitive Surgical’s Q3 2021 revenues to be around $1.34 billion, slightly below the $1.39 billion consensus estimate. The ongoing vaccination programs and gradual opening up of economies has resulted in an increase in procedures volume over the recent quarter, and this should augur well for Intuitive Surgical’s top line growth, when compared to the prior year quarter. However, the recent surge in Covid-19 cases may have adversely impacted the overall revenue growth for the company.  da Vinci procedure volume grew a stellar 68% in Q2 2021, driving total sales 72% higher to $1.46 billion. Sales growth reflect higher instruments & accessories sales, as well as an increase in system placements. Intuitive Surgical placed 328 systems last quarter, compared to 178 systems in the prior year quarter. Note that it was a favorable comparison to Q2 2020, which was significantly impacted from deferment of elective surgeries, amid the lockdowns. Our dashboard on Intuitive Surgical Revenues offers more details on the company’s segments.

2) EPS likely to be ahead of consensus estimates

Intuitive Surgical’s Q3 2021 adjusted earnings per share (EPS) is expected to be $1.22 per Trefis analysis, slightly above the consensus estimate of $1.17. Intuitive Surgical’s adjusted net income of $477 million in Q2 2021 reflected a large 3.6x rise from its $132 million figure in the prior-year quarter. The rise in earnings was higher than revenues due to over 1700 bps expansion of net margins, driven by lower operating expenses (as a percentage of revenue) as well as lower taxes. We believe that margins will remain strong going forward, as the procedure volume increases. For the full-year 2021, we expect the adjusted EPS to be higher at $4.96 compared to $3.38 in 2020.

(3) Stock price estimate above the current market price

Going by our Intuitive Surgical’s Valuation, with an EPS estimate of around $4.96 and a P/E multiple of around 70x in 2021, this translates into a price of $345, which is 6% above the current market price of around $326. Investors have assigned a high trading multiple for ISRG stock, given the strong revenue and earnings growth over the past years, and this trend is expected to continue going forward, as well. Note that Intuitive Surgical generates recurring revenues from every system placed, driven by the instruments and accessories sales, as well as services.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

While ISRG stock may see more gains going forward, 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 Pfizer vs Merck.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.