Intuitive Surgical continues to be one of the market’s hottest stocks.
Up approximately 800% over the past decade, Intuitive Surgical (ISRG -0.26%) has been a big under-the-radar winner for a long time. The company’s momentum continued recently as the stock jumped following another strong earnings report from the maker of the da Vinci robotic-assisted surgery system. That left the shares up about 45% on the year.
This begs the question: Is it too late to buy the stock, or can its momentum continue? Let’s take a closer look at the company’s recent results, and its planned broad-based launch of its new da Vinci 5 system next year, to help answer that question.
Strong growth and the da Vinci 5
For its third quarter, Intuitive Surgical posted strong results, with revenue up 17% to $2.04 billion and adjusted earnings per share (EPS) climbing 26% to $1.84. Those results topped the analyst consensus calling for adjusted EPS of $1.64 on revenue of $2.01 billion.
The earnings beat was helped by an improvement in the company’s adjusted gross margins, which rose 30 basis points to 69.1%, and solid expense management.
Instruments and accessories revenue jumped by 18% to $1.26 billion. This stems from the sale of single-use tools used during surgeries, and thus tends to follow procedure volumes, which also rose 18% for its da Vinci Systems. Procedures for its Ion system, which is used for robotic bronchoscopy (lung biopsy), soared 73%.
The company shipped 379 da Vinci surgical systems in the quarter, increasing its installed base to 9,539 systems, up 15% year over year. This included 110 of its new da Vinci 5 systems, which are still in a soft launch phase. Of the systems shipped, 220 were sent under operating lease arrangements, including 141 systems that were sent under usage-based operating lease arrangements.
For its Ion system, the company increased its installed base by 50% year over year. This included expanding the system internationally, with two placements in China and three in Europe. Intuitive also grew the installed base of its SP System, which is a single port that helps perform surgery through a single incision, by 53%. It credited strong multi-specialty adoption, especially in South Korea, and early adoption in Japan and Europe for the increase.
International procedure growth was strong, up 24% despite pressures in some areas. The company noted that there was an ongoing doctor strike in South Korea, while the U.K. and Germany were seeing capital spending pressure due to government budget constraints. It also noted domestic competition in China.
Intuitive Surgical generated about $600 million in free cash flow, bringing its total to $8.3 billion. It has no debt.
Looking ahead, the company raised the low end of guidance for full-year procedure growth, taking it to a range of 16% to 17% from a prior range of 15.5% to 17%. It said the low end of the range assumes a continued softening in bariatric procedures and effects from the physician strikes in South Korea. Bariatric procedures have been on the decline due to GLP-1 weight loss drugs.
Turning toward next year, Intuitive Surgical will broadly launch its new da Vinci 5 system by mid-2025. The company noted that early feedback shows that surgeons are saving time with the new device. Intuitive says it’s seeing strong early interest in the system.
Image source: Getty Images.
Is it time to buy the stock?
The da Vinci 5 system will come with a 30% higher average selling price (ASP) than its predecessor Xi, although the company said that since it comes with more standard options, the apples-to-apples cost is closer to 15% more. However, it said gross margins will initially be less and will need to be built up over the next few years.
With 180 da Vinci 5 system placements within the first two quarters of its soft launch, demand appears to be robust for the system. In comparison, the Xi only had 200 placements in the first 12 months of its launch in 2014. The system has approval in the U.S. and just recently got clearance in South Korea, while Intuitive Surgical continues to be in discussions with Japan’s regulatory bodies. It is not set to launch in Europe next year.
As such, it looks like the da Vinci 5 should be a nice growth driver for the company. While the increased systems sales will help, the key is to continue to increase the installed base and drive more procedures. While the da Vinci 5 has a number of upgrades over the Xi, such as 3D display and force-sensing technology, the key is that the platform saves time. This increases physician utilization, which helps them, and can lead to more procedures, which helps Intuitive Surgical.
The one issue with Intuitive Surgical is valuation, with the stock now trading at a forward price-to-earnings (P/E) of 66 based on next year’s analyst estimates. That’s fairly pricey and toward the high end of its range over the past decade.
ISRG PE Ratio (Forward 1y) data by YCharts.
I think Intuitive Surgical will continue to be a long-term winner, and I believe that it has a great “razor/razor blade” model, as most of its revenue comes from the sale of single-use tools. This means revenue grows as it expands its installed base and more procedures are done using its systems.
That said, I wouldn’t chase the stock at its current valuation, and would look for pullback before jumping in.