Intuitive Surgical: Strong Growth vs. Valuation Vexing

Intuitive Surgical, Inc. (ISRG) manufactures and develops robotic-assisted products, most notably with the da Vinci surgical system and related instruments and accessories, to improve clinical outcomes of patients through minimally invasive surgery. Its products include Da Vinci and Ion. The company was founded in 1995 and is headquartered in Sunnyvale, California.

I am bearish on ISRG mainly because of its lofty valuation, as the company has very strong fundamentals. Top Analysts most probably include Intuitive Surgical in their lists of growth stocks.

Intuitive Surgical Business News

Intuitive Surgical in mid-December 2021 announced FDA approval of its 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. It should launch in the U.S. in 2022, and then in other countries.

On December 14, 2021, the company announced that more than 10 million surgeries worldwide had used the robotic-assisted da Vinci surgical systems.

Intuitive CEO Gary Guthart said, “While we are proud of this milestone and momentum, this is really a moment to look at what we’ve learned from these 10 million procedures and ask ourselves how we can apply that to improving the field of surgery for years to come.”

Fourth Quarter 2021 and Full-Year 2021 Financial Results

Some of the Q4 2021 highlights include worldwide da Vinci procedures, which increased approximately 19% compared with the fourth quarter of 2020, revenue of $1.55 billion that increased 17% compared with $1.33 billion in the fourth quarter of 2020, and GAAP net income of $381 million, or $1.04 per diluted share, compared with $365 million, or $1.01 per diluted share, in the fourth quarter of 2020.

ISRG stock earnings in FY 2021 have increased significantly and rebounded from FY 2020, as the pandemic had an noticeable impact on the firm’s business.

Intuitive Surgical has stated that the pandemic continues to be a key problem to its business operations with the differentiated outcome by both geography and region. A massive percentage of surgeries were deferred during lockdown periods, and deferrals continue to occur in some locations.

Turning to FY 2021 financial results, revenue of $5.71 billion increased 31.01%, gross income of $3.94 billion increased 38.81%, net income of $1.7 billion rose 60.72% and free cash flow of $1.74 billion increased 51.83%. Finally, EPS Diluted of $4.66 increased 58.56%. Overall, 2021 was a very solid fiscal year with a lot of growth in key metrics.

Fundamentals – Risks

Intuitive Surgical has a very strong balance sheet with no debt and very strong financial health. In FY 2021 gross margin increased to 69.1% from 65.6% in 2020, and net margin expanded to 30.78% from 24.33% in 2020. Operating margin and efficiency improved too.

The main risk now, which is hard to ignore, is ISRG stock’s rich valuation. Additionally, Intuitive Surgical has disclosed 46 risks, with its Production risk above the industry average.

Valuation

Year-to-date, ISRG stock has losses of approximately 21%. The 1-year return is nearly 7%. This means that the stock underperformed Nasdaq on a year-to-date basis, but it has outperformed on a 1-year basis. Intuitive Surgical Inc. has shown predictable revenue and earnings growth.

Intuitive Surgical Inc. stock’s Price/Sales ratio of 18.1 is close to its 1-year low of 17.27, and Intuitive Surgical Inc. stock’s Price/Book value ratio of 8.5 is close to its 1-year low of 8.09. 

However, shares of Intuitive Surgical are relatively expensive, based on their PE Ratio (60.8x) compared to the U.S. Medical Equipment industry average (47x), based on their PB Ratio (8.5x) compared to the the U.S. Medical Equipment industry average (3.3x), and finally based on their PEG Ratio (6x).

Wall Street’s Take

Intuitive Surgical has a Moderate Buy consensus based on ten Buys, six holds, and one Sell ratings. The average Intuitive Surgical price target of $329.27 represents 16.3% upside potential.

Conclusion

This technology company that develops robots for the Healthcare sector has excellent fundamentals and a very strong balance sheet. FY 2021 was a robust one, with growth in key metrics such as revenue growth and profitability, while the free cash flow trend is very positive and strong. The only factor not to like now is the elevated stock price.

Download the TipRanks mobile app now

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.