The day after Intuitive Surgical, Inc. (NASDAQ: ISRG) beat on earnings, ISRG stock is off to the races. On a day when the broader market is slumping, shares of Intuitive Surgical are up more than 11% in late-session trading. This puts the stock up 26% for the month. But with a forward price-to-earnings (P/E) ratio of 64x, is it worth the premium price?
Looking at the Intuitive Surgical analyst rankings, the answer may be yes. No fewer than a dozen analysts have boosted their price targets on ISRG stock since the earnings report. And the majority of those targets are above the consensus price as of this writing of approximately $300 per share. Let’s take a look at why analysts may be so bullish.
It’s a Simple Math Problem
Intuitive Surgical was on an accelerating growth path since around 2016. That path was interrupted by the Covid-19 pandemic. At that point, the math simply didn’t work in the company’s favor. Fewer surgeries meant lower demand for robotic surgery systems like Intuitive Surgical’s da Vinci surgical system.
However, ISRG stock soared as investors bought the dip hard. But the rug got pulled in late 2021 along with many other tech stocks. But in the case of ISRG, investors simply weren’t seeing the growth in revenue and sales to justify the company’s valuation.
But robotic surgery systems are substantial expenses for a hospital. And these purchases can take months, if not years, to get approval. That seems to be what’s happening as the volume of surgical procedures is on the rise.
The company reports growth in the number of da Vinci systems being seeded. Specifically, the company reports that there are now 7,779 systems installed worldwide. That’s 12% higher than a year ago.
The takeaway is that more surgical procedures will lead to more installed systems. And as a company with a 21% profit margin, that supports the premium valuation.
Can AI Be a Catalyst Hiding in Plain Sight?
Artificial intelligence is one of the hottest sectors for investors in 2023. While Intuitive Surgical is not a pure play on AI, the company is making a strong push into this area. And it’s not hard to understand why.
First, there are some studies that suggest the use of AI models can reduce the cost and potential complications of some surgeries by somewhere between 40% to 50%. One way it’s doing this is by giving doctors and surgeons access to a raft of data that can help them identify the patients that make the best candidates for certain surgeries. Hospital management pays attention to that kind of statistic because there will always be pressure to improve both cost and quality as it relates to surgery.
But Intuitive Surgical is also using AI to help train the next (and smaller) generation of physicians. Hollywood has delivered quite a few blockbusters based on the idea of the teaching hospital. In the future, a lot of that training will increasingly be done with artificial intelligence, and Intuitive Surgical is likely to be on the forefront of this change.
More of the Same or a Wall of Resistance?
So, is ISRG a screaming buy? If you believe it’s closer to $400 a share than $200 than yes. The current spike in the company’s stock continues a trend that started in early March, and more broadly in mid-October when some bullish analysts suggest the bear market ended.
However, it should be noted that prior to last October, ISRG was trending along with the broader market. And that trend was much lower.
For the moment, ISRG is making new highs while the S&P 500 is also near its 52-week high. That’s a bullish combination. But if the economy weakens there could be some downside for ISRG stock. -
Analysts are forecasting that revenue and earnings will both average double-digit growth over the next five years. Of course, nobody knows if that will happen. But if it does it suggests that the company may grow into what is, for sure, a premium valuation.
