Intuitive Surgical: Fantastic Company, Expensive Stock

© Reuters. Intuitive Surgical: Fantastic Company, Expensive Stock

Intuitive Surgical (NASDAQ:ISRG) is focused on innovating to enhance the quality of, and access to, minimally invasive care.

The company's primary offering is its platform for robotic-assisted surgery, comprising its family of da Vinci Surgical Systems. As robotic surgery volumes continue to gain traction worldwide, the company's top and bottom lines have been snowballing for years.

Being the most comprehensive company in the market, Intuitive Surgical is likely to remain a leader in its industry, and continue expanding its operations and financials.

That said, its stock has lately become too pricey to ignore the risk of a potential valuation compression. For this reason, I am neutral in the stock. (See ISRG stock charts on TipRanks)

Recent Results

Intuitive Surgical's Q2 results were truly impressive, mainly because of the company's growth acceleration. Hospitals were flooded last year as a result of the COVID-19 pandemic, causing Intuitive Surgical's da Vinci deliveries to slow down. However, moving into 2021, Intuitive has been firing on all cylinders.

In Q2, revenues came in at $1.46 billion, a 72% increase year-over-year. Not only is this figure well above the company's pre-COVID levels, but it's also a new quarterly sales record.

The company delivered 328 da Vinci systems, 84% more versus the comparable period last year, expanding its installed base by 10% to approximately 6,335 systems. This number is quite remarkable considering that in markets such as Europe, COVID-19 and its variants continue to limit the capabilities of hospitals.

It's also worth emphasizing Intuitive Surgical's juicy margins, which returned to normalcy quite quickly. Stable margins are an essential characteristic in determining the company's future profitability and evaluating its valuation multiple.

Due to Intuitive's minimalistic operations and tidy balance sheet, which doesn't hold a single dollar of long-term debt, apart from its operating and R&D expenses, the leftover gross profits drop down to the bottom line.

Hence, Intuitive's net margins rebounded to north of 35% in its most recent quarter. The company is a cash cow, which after being profitable quarter after quarter, has accumulated a massive cash position of $7.7 billion, without raising any debt or equity in the meantime.

Valuation Is Hard to Swallow

The stock's valuation multiple has expanded to new highs, which is likely to reduce future upside. The forward P/E currently stands way beyond its historical average, at 60.6.

Further, the company has never paid dividends and has not stated any intentions of doing so. Hence, investors should expect to enjoy returns only in the form of capital gains, at least in the medium-term.

The company does, however, repurchase shares in order to return capital to its shareholders. Buying back stock at such a high multiple is unlikely to benefit shareholders, though, as the company could be overpaying for its own stock. Hence, investors should be wary of the stock's current valuation and its effect on the short-to-medium-term upside (or downside) potential.

Wall Street’s Take

Turning to Wall Street, Intuitive Surgical has a Moderate Buy consensus rating, based on five Buys, nine Holds, and zero Sells assigned in the past three months. At $1,012.08, the average ISRG price target implies 1% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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