We think Intuitive Surgical stock (NASDAQ: ISRG) is currently a better pick than Roper Technologies stock (NYSE: ROP), a software, engineered products, and solutions provider, with a similar revenue base as Intuitive Surgical, despite Intuitive Surgical’s comparatively higher valuation. ISRG stock trades at about 18x trailing revenues, compared to 8x for ROP stock. We believe that this gap in the valuation of the two companies is justified, given Intuitive Surgical’s better revenue growth and profitability, along with its better growth prospects.
Looking at stock returns, ROP stock, with -9% returns over the last six months, has outperformed ISRG stock, which saw a -15% change. Both the stocks have underperformed the broader indices, with a 0% change in the S&P500 over the same period. ISRG stock, in particular, has been weighed down due to its tepid 2022 outlook, given the expected adverse impact of Omicron on the total volume of procedures in Q122.
However, there is more to the comparison, and we believe Intuitive Surgical stands out with higher expected returns than Roper Technologies, as discussed in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – Intuitive Surgical vs. Roper Technologies: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
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- Will Intuitive Surgical Stock See Higher Levels Post Q2 Results?
- Should You Buy, Sell, Or Hold Intuitive Surgical Stock Around $200?
While ISRG stock looks poised for better gains in the future, it is helpful to see how its peers stack up. Check out how Intuitive Surgical’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
1. Intuitive Surgical’s Revenue Growth Has Been Stronger
- Both companies managed to see sales growth over the recent years, but Intuitive Surgical has witnessed a comparatively faster revenue growth. Intuitive Surgical’s sales have jumped from $3.1 billion in 2017 to $5.7 billion over the last twelve months, while Roper Technologies’ revenue has risen from $4.6 billion to $6.1 billion over the same period.
- For Intuitive Surgical, revenue growth over the recent quarters was driven by a rebound in procedure volume, which was adversely impacted in the initial phases of the pandemic, due to the shelter-in-place restrictions. Our Intuitive Surgical Revenues dashboard provides more details on the company’s top-line.
- For Roper Technologies, the revenue growth is being driven by the increased contribution of Application Software over the recent past. Under this segment, the company offers software solutions for government contracting, professional services, and acute healthcare markets. The segment revenue grew 32% y-o-y in 2021, and it accounted for 41% of the company’s total revenue in 2021, compared to a 37% contribution in 2020.
- Intuitive Surgical’s last three-year revenue CAGR of 16% is better than 6% CAGR for Roper Technologies.
- Looking forward, Intuitive Surgical’s revenue is expected to grow faster than Roper Technologies over the next three years. The table below summarizes our revenue expectation for the two companies over the next three years and points to a CAGR of 14% for Intuitive Surgical, compared to a CAGR of 3% for Roper Technologies, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Intuitive Surgical Is More Profitable, And It Comes With Lower Risk
- Intuitive Surgical’s operating margin of 31% over the last twelve-month period is much higher than 14% for Roper Technologies. However, the recently released full-year 2021 results for Roper Technologies points toward a 26% operating margin in 2021.
- Our Intuitive Surgical Operating Income and Roper Technologies Operating Income dashboards have more details.
- Intuitive Surgical’s free cash flow margin of 37% is also better than 33% for Roper Technologies.
- Looking at financial risk, Intuitive Surgical beats Roper Technologies with its better debt and cash position. Intuitive Surgical’s <1% debt as a percentage of equity is much lower than 18% for Roper Technologies, while its 64% cash as a percentage of assets is much higher than 2% for the latter, implying that ISRG stock, with its better debt and cash position, offers lower financial risk compared to ROP stock.
3. The Net of It All
- We see that Intuitive Surgical has demonstrated better revenue growth, and it is more profitable than Roper. It also offers lower financial risk, justifying the valuation gap.
- However, looking at a valuation based on P/EBITDA, both the stocks are comparable. At its current levels, ISRG stock represents a P/EBITDA multiple of a little over 41x based on Intuitive Surgical EBITDA for the last twelve months, while ROP stock represents a P/EBITDA of a little under 47x based on Roper Technologies EBITDA over the same period.
- We believe Intuitive Surgical is currently the better choice of the two, based on prospects, using P/S as a base due to high fluctuations in P/E and P/EBIT. The table below summarizes our revenue and return expectation for ISRG and ROP over the next three years and points to an expected return of 41% for ISRG over this period vs. 7% expected return for ROP stock, implying that investors are better off buying ISRG over ROP, based on Trefis Machine Learning analysis – Intuitive Surgical vs. Roper Technologies – which also provides more details on how we arrive at these numbers.
While ISRG stock may outperform ROP, the Covid-19 crisis has created many pricing discontinuities that offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Roper Technologies vs. Installed Building Products.
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