Here’s Why Intuitive Surgical Stock Is A Better Pick Over This Medical Devices Company

We think Intuitive Surgical stock (NASDAQ: ISRG) is currently a better pick than Stryker stock (NYSE: SYK), despite ISRG being the more expensive of the two, with its P/S ratio of 13.7x, compared to just 4.7x for SYK stock. This gap in the valuation is largely justified, given Intuitive Surgical’s superior revenue growth, better profitability, lower financial risk, and better growth prospects.

If we look at stock returns, Intuitive Surgical’s 37% fall year-to-date has been worse than the 18% decline for Stryker. This compares with a 12% fall in the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss why we believe ISRG stock will offer better returns than SYK stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Intuitive Surgical vs. Stryker: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Intuitive Surgical’s Revenue Growth Has Been Stronger

• Both companies managed to see sales growth over the last twelve months. Still, Intuitive Surgical has witnessed comparatively faster revenue growth of 15.5% vs. 9.0% for Stryker.
• Looking at a longer time frame, Intuitive Surgical’s sales rose at an average annual growth rate of 16.2% to $5.7 billion in 2021, compared to $3.7 billion in 2018, while that for Stryker stood at 8.4%, with revenue of $17.1 billion in 2021, vs. $13.6 billion in 2018.
• For Intuitive Surgical, revenue growth over the recent past has been 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. The company continues to expand its installed base, which results in the growth of recurring revenues, such as consumables.
• Stryker’s revenue growth has been driven by new product launches, such as – Surgi-Count+ – a surgical sponge counting system. Earlier this year, it launched Insignia Hip Stem and Power-PRO 2 ambulance cot, aiding its revenue growth. Of late, it has seen a rise in volume for both of its segments – MedSurg & Neurotechnology and Orthopedics and Spine.
• Stryker’s revenue growth has also been buoyed by the acquisition of Wright Medical, a medical device company, in late 2020. Earlier this year, Stryker agreed to acquire Vocera Communications – a company focused on communications systems for the healthcare industry.
• Our Intuitive Surgical Revenue and Stryker Revenue dashboards provide more insight into the companies’ sales.
• Looking forward, Intuitive Surgical’s revenue is expected to grow faster than Stryker’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 13.9% for Intuitive Surgical, compared to a 7.2% CAGR for Stryker, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies negatively impacted by Covid and those 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 three years before Covid to simulate a 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 13.7% over the last twelve months is marginally better than 13.2% for Stryker.
• This compares with 30.7% and 18.2% figures seen in 2019, before the pandemic, respectively.
• Our Intuitive Surgical Operating Income and Stryker Operating Income dashboards have more details.
• Intuitive Surgical’s free cash flow margin of 31.3% is much higher than 17.4% for Stryker.
• Looking at financial risk, Intuitive Surgical is much better placed than Stryker. Its 0.6% debt as a percentage of equity is much lower than 33.2% for Stryker, while its 62.4% cash as a percentage of assets is much higher than 6.8% for the latter, implying that Intuitive Surgical has a better debt position and has more cash cushion.

3. The Net of It All

• Intuitive Surgical has demonstrated better revenue growth and superior profitability and offers lower financial risk. On the other hand, Stryker is available at a relatively lower valuation.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Intuitive Surgical is currently the better choice of the two.
• The table below summarizes our revenue and return expectations for Intuitive Surgical and Stryker over the next three years and points to an expected return of 60% for ISRG over this period vs. a 30% expected return for SYK stock, implying that both stocks offer good buying opportunity at current levels but if investors have to pick one, they will likely be better off buying ISRG over SYK, despite its high valuation, based on Trefis Machine Learning analysis – Intuitive Surgical vs. Stryker – which also provides more details on how we arrive at these numbers.