Intuitive Surgical (ISRG) stock has been on quite an impressive rally, now up around 33% year-to-date and over 170% from its March 2020 lows. Despite being a top firm within the robotic surgery space, analysts remain mixed on the name at these valuations, with more Hold than Buy ratings.
While there’s no denying the marvel that is Intuitive’s da Vinci surgical system or the front-row seat that the company has in the emerging robotic-assisted surgery space, there are a handful of challenges that could cause shares to stumble and shed a bit of its hefty premium. For that reason, I am neutral on ISRG stock. (See Analysts’ Top Stocks on TipRanks)
Undoubtedly, COVID-19 hospitalizations have caused many surgeries to be delayed through this pandemic. Still, new installations of Intuitive’s flagship product have remained robust in the Delta-plagued third quarter, up an impressive 72% year-over-year. Quite remarkable growth, given the prominent COVID-19 Delta variant headwinds.
Despite incredible strength in the U.S. market, potential near-term catalysts, and the encouraging full-year guidance upside revision, potential longer-term risks should be considered closely by investors, especially after an epic run.
Intuitive Surgical: The Longer-Term Outlook Seems Hazy
Going into the new year, COVID-19 could go endemic, and if it does, many delayed procedures will finally have a chance to be performed. With that, a bump in orders could benefit Intuitive Surgical. Still, with shares of ISRG trading at over 23 times sales, it appears that any such strength is already more than baked in here.
Furthermore, a slump could follow a sudden pick-up in orders as hospital balance sheets begin to tighten, making it harder to justify a big-ticket purchase like a da Vinci surgical system.
Moreover, with Johnson & Johnson (JNJ) unveiling its robot-assisted surgery system, Ottava, last year, Intuitive Surgical could face stiffer competition two years down the road.
Fortunately for Intuitive, Johnson & Johnson recently stated that its Ottava robot faces a delay of two years due to a “temporary setback.” Indeed, Intuitive Surgical has another two years to go without worrying about a behemoth of a competitor in Johnson & Johnson breathing down its neck.
While Ottava won’t be launched until at least the second half of 2024, long-term investors should not discount the potential competition-induced margin erosion that could strike down the road.
Innovation Remains Key to Long-term Success as New Rivals Appear
The question on the minds of ISRG shareholders ought to be whether the company can continue innovating to ensure its da Vinci robot is the best offering out there in the robotic surgery space.
Given the strength of management, it certainly seems like Intuitive Surgical can retain its competitive edge, even as its market gets that much more crowded over the next five years.
Still, it would be unwise to think Johnson & Johnson won’t pose a threat come the second half of 2024. In any case, there’s no reason why both rivals can’t thrive, especially as robotic surgery becomes more broadly accepted, with the door likely to be open to new types of procedures that aren’t practical today.
Wall Street’s Take
Turning to Wall Street, ISRG stock earns a Moderate Buy consensus rating. Out of 12 analyst ratings, there are four Buys and eight Holds assigned in the past three months.
The average Intuitive Surgical price target is $352.20, implying 2.8% downside potential. Analyst price targets range from a low of $323 per share to a high of $383.30 per share.
The Bottom Line on Intuitive Surgical Stock
I’m a big fan of Intuitive Surgical and its long-term growth prospects, even with competitive pressures likely to mount.
Still, the hefty valuation makes ISRG stock tough to get behind. For that reason, investors should be cautious chasing the name at these heights, given the magnitude of uncertainties.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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