Intuitive Surgical (ISRG) posted its Q2 and half-year results for FY2024 last week, with numbers coming in better than expected. The robotic surgery giant beat both Wall Street’s top and bottom-line estimates and sustained exceptional momentum. In response, shares surged to new highs after earnings. With the market expecting an equally strong second half of the year, it’s pretty likely that Intuitive Surgical stock will keep recording further gains. Accordingly, I am bullish on ISRG stock.
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Robust Growth Persists; No Signs of Slowing Down
Intuitive’s growth remained robust in Q2 2024, with revenue growing by 13.6% to $2.01 billion. Notably, this implies an acceleration compared to the prior quarter’s revenue growth of 11.5%, with the robotic surgery giant showing no signs of slowing down. Gains were seen across all divisions, with Instruments and Accessories, Systems, and Services each reporting increased sales.
Specifically, Systems revenue came in at $448 million, compared with $393 million last year, with Intuitive installing 341 da Vinci surgical systems in hospitals, up from 331 systems in Q2-2023. This included 70 da Vinci 5 Systems, the company’s latest generation system.
The successful launch of the da Vinci 5 is evident, with management highlighting positive customer feedback on improvements in precision, imaging, ergonomics, and integration. These enhancements have led to noticeable efficiency improvements in hospitals, indicating strong potential for future sales as more hospitals are inclined to upgrade their systems.
In the meantime, Intuitive’s “razor and blades” business model proved highly effective, with the company reaping substantial benefits from the sale of complementary products and services. This model is quite lucrative, as the consumables required for its systems generate notably higher margins. Instrument and Accessory revenues rose by 16% to $1.24 billion, driven by a 17% increase in da Vinci procedure volume, an impressive 82% surge in Ion procedure volumes (Intuitive’s new lung biopsy platform), and higher pricing.
Finally, Services saw a significant increase of 10.4%, reaching $317.3 million. Management attributed this growth to the swift adoption of Intuitive’s digital products and services, which performed well throughout the quarter.
Management also highlighted the substantial usage of the My Intuitive App, now employed by nearly 14,000 surgeons, and the Intuitive Hub, whose user base has more than doubled over the past year. The company remains optimistic about the growth prospects in this segment, citing the long-term potential of computational tools.
Explosive Margin Expansion Propels Earnings Higher
As previously mentioned, Intuitive Surgical’s “razor and blades” business model drives strong profitability as the company expands its operations. This is due to economies of scale, which are fueled by increased sales of accessories as the number of procedures continues to grow.
Evidently, Intuitive’s gross margin in Q2 came in at an extraordinary 70% compared to 68.5% in the previous quarter and 67.6% last quarter. Although Q2 margins reflected certain one-time benefits that won’t recur, the gross margin would still have been an impressive 69.5%, even when excluding these benefits, marking a strong expansion.
Can ISRG Stock’s Valuation Support Further Gains?
Despite Intuitive’s impressive Q2 numbers, a valid question is whether the stock can sustain further gains from its current levels. Following a strong year-to-date rally and additional post-earnings gains, some might argue that ISRG stock is now overvalued. However, given the rapid growth of Intuitive’s earnings and the fact that the company is not only an industry leader but is also pioneering the robotic surgery market, it is hard to argue against its bullish case, even at its current price levels.
Specifically, the combination of double-digit revenue growth and expanding margins led to Intuitive’s adjusted earnings per share (EPS) increasing by 25.4% to $1.78. This growth rate, coupled with Intuitive’s strong market position and debt-free status, explains why investors are likely to keep paying a premium for the stock. While shares appear expensive with a forward P/E of 60x, the solid underlying EPS growth and investor willingness to sustain a high multiple suggest that further gains remain possible.
Is Intuitive Surgical Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Intuitive Surgical features a Strong Buy consensus rating despite its already prolonged rally. This sentiment is backed by 13 Buys and four Holds assigned in the past three months. At $477.44, the average ISRG stock forecast suggests 3.54% upside potential.
If you are still deciding which analyst to follow for buying and selling ISRG stock, the most profitable analyst covering the stock (on a one-year timeframe) is Richard Newitter from Truist Financial, with an average return of 30.81% per rating and a 94% success rate. Click on the image below to learn more.
The Takeaway
Intuitive Surgical’s Q2 results exceeded expectations, displaying robust growth across all divisions and an impressive margin expansion. The successful launch of the da Vinci 5 system and the effectiveness of its “razor and blades” model reinforce the company’s strong market position. While valuation concerns are still in the spotlight, Intuitive’s solid earnings growth and continued innovation suggest that the stock is likely to maintain its upward trajectory.
