Intuitive Surgical (NASDAQ: ISRG) recently reported its Q3 results, with revenues lower but earnings beating our estimates. The company reported revenue of $1.7 billion, up 12% y-o-y and below our $1.8 billion estimate. Its adjusted earnings of $1.46 per share were up 23% y-o-y and above our estimated $1.42 per share. In this note, we discuss Intuitive Surgical’s stock performance, key takeaways from its recent results, and valuation.
ISRG stock has seen little change, moving slightly from levels of $275 in early January 2021 to around $265 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. Overall, the performance of ISRG stock with respect to the index has been lackluster. Returns for the stock were 32% in 2021, -26% in 2022, and 1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – indicating that ISRG underperformed the S&P in 2022 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector, including LLY, UNH, and JNJ, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ISRG face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, ISRG stock looks attractive and will likely see higher levels over time. We estimate Intuitive Surgical’s Valuation to be $310 per share, reflecting a 16% upside from its current levels of $267. Our forecast is based on a 56x P/E multiple for ISRG and expected earnings of $5.55 on a per-share and adjusted basis for the full year 2023.
Intuitive Surgical’s revenue of $1.7 billion reflects a 12% y-o-y growth driven by a 19% rise in worldwide da Vinci procedure volume. The company placed 312 da Vinci systems during the quarter, reflecting a 2% y-o-y increase. A slowdown in bariatric procedures due to the increased adoption of glucagon-like peptide-1 (GLP-1) drugs and anti-corruption campaigns in China weighed on the overall system placements, a trend expected to continue in the near term. Its operating margin improved around 100 bps to 26.7% in Q3. This can be attributed to lower SG&A expenses as a percentage of revenue. Higher revenues and margin expansion led to a 23% y-o-y rise in the bottom line to $1.46 on a per-share and adjusted basis.
ISRG stock is trading at 14x sales, compared to the last five-year average of 21x. We believe investors will likely be better off picking ISRG on any dips for robust gains in the long run. However, the increased adoption of GLP-1 and the system placement slowdown in China remain key risk factors in realizing these gains.
|S&P 500 Return||-1%||10%||89%|
|Trefis Reinforced Value Portfolio||-2%||21%||520%|
 Month-to-date and year-to-date as of 10/23/2023
 Cumulative total returns since the end of 2016