close
close

This leader in robot-assisted surgery just released some exceptional results. Is it a buy?

Posted on by angelo
This leader in robot-assisted surgery just released some exceptional results. Is it a buy?

Intuitive Surgical is poised to continue its reign as the leader in the robotic-assisted surgery industry and capitalize on its growing market.

Intuitive Surgery (ISRG 2.21%) is an innovative company that is using robotics to revolutionize the healthcare industry. Its cutting-edge da Vinci system is taking surgical precision to a new level, and doctors are taking notice. The company boasts that the da Vinci system is used once every 17 seconds. Shares have been on a strong rally in 2024, up 30%, more than three times the return of the S&P 500.

The company reported stellar results on July 18, and shares are up more than 9%. So how exactly does Intuitive Surgical make money, and what are the future prospects for its stock?

Intuitive Surgical Robots Are Pioneers in the Operating Room

Intuitive Surgical has developed cutting-edge products that help physicians perform minimally invasive surgeries. Intuitive’s flagship product is the da Vinci, a robotic surgical system that enables complex surgeries with unmatched precision across a variety of treatment areas.

Doctors like the system because it dramatically reduces human error during operations. Its robotic arms hold the tools and cutting instruments instead of the surgeons themselves. The surgeon operates the arms remotely, viewing the operating area through eyepieces connected to two high-definition 3D cameras.

Robotic arms allow for smaller, more precise cuts and eliminate the risk of tremors that could affect a human hand. In addition, the camera can provide a magnified view of the operating area, superior to that of the naked eye, allowing for better decision-making.

These benefits reduce complications and lead to faster recovery times for patients.

Key Indicators Show Dazzling Performance in Q2 Results

Perhaps the company’s most important metric is the growth in the number of procedures using its systems. In the second quarter, procedure growth for the da Vinci was 17%. Procedures with the company’s other product, Ion (used specifically for lung biopsies), were up 82%. As more physicians see the product in use, that’s driving adoption of both systems. Similarly, Intuitive expects continued procedure growth throughout the rest of the year.

The increase in the number of procedures also increases sales of instruments and accessories, which are its largest revenue segment. These are the surgical instruments that the da Vinci’s arms hold and that surgeons must replace after use, making them a necessary recurring expense for facilities.

Intuitive has seen steady revenue growth and is on track to grow by year-end. Beyond revenue, the company has consistently increased recurring revenue as a percentage of total revenue. Recurring revenue is a contractual obligation, which strengthens revenue stability and improves earnings quality. As shown in the table below, Intuitive has maintained this success over the past several years.

Intuitive Surgical Revenue
Period Total income Recurring revenue as a % of total revenue
2021 $5.7 billion 75%
2022 $6.2 billion 79%
2023 $7.1 billion 83%
First half of 2024 $3.9 billion 86%

Chart by author. Source: Company filings.

Not only is the industry leader hitting its revenue targets, it’s also seeing that success trickle down to its financial results. Overall, adjusted earnings per share rose 19% from a year earlier and posted a 16% surprise to estimates.

Additionally, the company’s latest product, the da Vinci 5, is seeing higher demand than analysts expected. It installed 70 of the systems in healthcare facilities in the second quarter, a significant increase from the eight it installed in the first quarter. Intuitive is ramping up its production capacity to meet that demand, adding 250 to 300 production employees during the quarter.

The results pleased investors and sent stocks higher immediately after the release.

Spectacular fundamentals support Intuitive’s valuation

The company’s valuation is high, with a forward price-to-earnings ratio of 67. That’s well above the S&P 500’s healthcare sector’s forward price-to-earnings ratio of 19. However, for some, it’s justified. The company has a solid 26% operating margin, no debt, and over $4.7 billion in cash and short-term investments.

Intuitive’s healthy financial position allows it to acquire other companies to increase efficiency or expand its offerings, which it already did in 2019 and 2020, buying Orpheus Medical and part of Schölly Fiberoptics. Intuitive also has ample room to create a more optimized capital structure by adding debt to lower its cost of capital if interest rates fall.

Barriers to entry are high for potential competitors. The Da Vinci robot is currently the only surgical robot approved by the U.S. Food and Drug Administration (FDA) to perform a variety of procedures. Developing a competing product and obtaining FDA approval is costly. The average selling price of a Da Vinci robot is between $800,000 and $3.1 million, indicating how expensive it is to manufacture.

It would also be difficult to convince doctors to try a new, less established product, as such a move could increase exposure to malpractice liability, further cementing the rift between Intuitive and the company.

Analysts expect the robotic surgery market to more than double between 2023 and 2033. Additionally, the robotic surgery consumables market could grow even faster, potentially tripling by 2033 to more than $15 billion.

This is another good sign for Intuitive, as this is where it generates most of its revenue. Intuitive currently has a significant advantage (it controls nearly 60% of the market) in this sector and has the opportunity to capitalize on this growth.

Buying shares of this company with incredible fundamentals, despite its high valuation, is a bet that investors should consider a “set it and forget it” type of investment.