Should you buy Intuitive surgical stock?
$Intuitive Surgical(ISRG)$ is one of the best businesses in the world. The dominant player in robotic surgery has had huge success with its Da Vinci system and the stock has increased almost 23,000% from its initial public offering (IPO). At the latest price, the company's got a valuation of $164.24 billion.
Financials
Cash: $8 billion
Debt: $0
Trailing 12 months (TTM)
Revenue: $7.6 billion
Net income: 2.1 billion
Free cash flow (FCF): $420 million
Its numbers look closer to a good software company than a medical business.
Gross margins: 67% (STRONG)
EBITA margins: 40%
A great business
More than 80% of the revenue is recurring and the company continues to put up solid growth. The instruments and accessories segment which is mostly recurring revenue continues to grow in the high teens and there should be plenty more growth ahead. 2.6 million procedures are likely to be completed this year with intuitive systems but management thinks that this number can grow to over 20 million over the long term.
Risks
Of course, just because this is a great business doesn't mean that investors should necessarily buy the stock. The big problem here is the valuation. Based on the (TTM), the company is trading at:
P/E ratio: 78
EV/Sales: 20.4
Among companies with a market cap over 100 billion only, $ARM Holdings Ltd(ARM)$ and $NVIDIA Corp(NVDA)$ have a higher P/S Ratio. It's worth noting that its FCF margins have declined in recentlyears as the company has been investing in new facilities and manufacturing capacity.
FCF TTM (420 million) is now lower than the company stock-based compensation (TTM) (633 million) so investors need to be confident that it can maintain its growth and profit margins for many years into the future.
Medtronic and Johnson and Johnson are launching their own devices and Intuitive management has called out sharp competition in China. Regional governments there are giving preference to local manufacturers and putting price caps on surgical procedures and not everyone is happy about Intuitive monopoly status. To be fair, valuation and competition issues have been around for years and Intuitive Surgical stock has continued to move higher.
My Verdict
The company clearly has a wonderful business with deep relationships with major customers. Even AI could benefit the business given its data advantage over rivals. However, Intuitive's P/E ratio of 78 creates an extremely high hurdle to overcome which is why I will give the stock a neutral rating but these are my personal opinions and not financial advice. I do not hold any position in Intuitive Surgical.
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A range of 420-460 is historically in line. To break out will take a materially event such as new stock buy back, price increase or improved DaVinci 5 momentum.
I don’t trade ISRG but you can’t help notice when the techs turn this is the beneficiary.