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Intuitive Surgical: Great Company but Stretched Valuation
Stock Analysis & Ideas

Intuitive Surgical: Great Company but Stretched Valuation

Intuitive Surgical (ISRG) is an American corporation involved in the medical appliances and equipment industry.

I am neutral on Intuitive Surgical as its significantly stretched valuation multiples, weakening growth rate, and current premium to its consensus price target indicate that investors might want to wait for a better entry point.

Strengths

The company is involved in developing, manufacturing, and marketing robotic products that are made for helping patients through minimally invasive surgery to improve clinical outcomes. The company has an installed base of about 5,500 da Vinci Surgical Systems (the most notable one they own), with many of these being in the U.S. while the rest are distributed around the world.

The system is controlled by a surgeon through a console and is used for delicate surgical procedures like cardiac valve repair and prostatectomies.

Recent Results

For the third quarter of 2021, the company reported total revenue of $1.4 billion, showing a 30% increase since the previous year’s $1.1 billion in the same period. However, there was a 4% decline from the last quarter. Gross profit was reported at $971.4 million, which also increased from the previous year’s $724.3 million.

Net income stood at $387.2 million, which was also an increase since the last year, where net income was reported as $313.9 million. Earnings per share for stakeholders were $1.04. 

Total revenue was comprised of Instruments and Accessories, Services, and Systems, which contributed $755.4 million, $232.7 million, and $415.2 million toward the total, respectively. Compared to the previous year, the three segments showed growth, with Instruments and Accessories revenue growing 20%, Services revenue growing 30%, and Systems revenue growing 55%.

Total recurring revenue (not counted towards total revenue for the quarter) is $1.06 billion, increasing 24% since the previous year.

The total headcount for the quarter was 9,082 employees, while total cash and investments amounted to $8.2 billion.

Valuation Metrics

ISRG looks a bit pricey at the moment as its forward enterprise-value-to-EBITDA ratio is currently 46.9x compared to its five-year average multiple of 36.5x. In addition, its forward price-to-normalized-earnings ratio is 68.9x compared to its five-year average multiple of 48.7x. 

On top of that, growth in 2022 is expected to be fairly muted, with just 12.8% revenue growth, 7.7% EBITDA growth, and 13.5% normalized earnings per share growth.

Wall Street’s Take

Turning to Wall Street, Intuitive Surgical has a Moderate Buy consensus rating, based on three Buys and eight Holds assigned in the past three months. The average Intuitive Surgical price target of $356.22 implies 2.4% downside potential.

Summary and Conclusion

Intuitive Surgical is a leading innovator in an exciting field with significant long-term growth potential. On top of that, it is already solidly profitable and has a strong competitive position in the industry.

That said, the stock price looks a bit expensive at the moment as it is trading well above its historical valuation multiples. Its growth outlook over the next year seems relatively weak, and the consensus price target implies that the stock price will decline slightly over the next year.

As a result, while the company itself appears to have a bright future, investors might want to wait for a significant pullback in the share price before adding shares.

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Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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