Image source: Intuitive Surgical.

No one is going to argue that Intuitive Surgical (NASDAQ:ISRG) is a cheap stock. Shares trade for 36 times trailing GAAP earnings, a significant premium to the overall market. But I would argue that they aren't nearly as expensive as this key metric would have you believe.

More than one way to measure value

Before diving into avenues for growth, it's important to note that a company's price-to-earnings (P/E) ratio isn't the only way to measure how expensive its shares are. Here are other metrics I think are important.

P/E (Non-GAAP)

Forward P/E





Data source: Yahoo! Finance, E*Trade.

Perhaps the most important of these three is the price-to-free cash flow (FCF) figure of 27. In many cases, I think FCF can be a better proxy for how well a company is doing than earnings alone, which is subject to many adjustments based on accounting. Intuitive stock appears 25% cheaper based on FCF versus normal earnings.

If we take a look at Intuitive's FCF history, we see a company that's been able to grow quite well the amount of cash it has left at the end of each year. The one notable exception was in 2014, when hospitals were delaying purchases of daVinci systems for the release of the Xi model, and the same hospitals were keeping their purse strings tighter to get a better gauge of the effects of the Affordable Care Act on their budgets.

Data source: Securities and Exchange Commission filings.

But still, Intuitive Surgical stock is pretty expensive, right?

There are two key variables you need to consider before determining how expensive Intuitive Surgical stock is. The company has been riding high for the past two years off the strength of its procedure growth. That growth has come primarily through expansion in its U.S. general surgery category. While specific numbers aren't provided, we know that a lot of this growth has come from the burgeoning use of the daVinci to perform hernia operations in the United States.

That's the key advantage in owning shares of Intuitive Surgical. As an ever-increasing number of doctors log more and more hours on the daVinci Xi, they will have increased opportunity to tinker with the robot in more procedures. That kind of optionality lends itself to low-risk, high-reward results for shareholders.

If you look to the horizon, there are several procedures that could join hernias as the newest frontier for Intuitive: colorectal procedures, thoracic surgery, and colon and lung resections.

The key threat that many might not be aware of is continuing research on the efficacy of using the daVinci. It's no secret that Intuitive's sales force has been somewhat pushy in the past at encouraging patients and doctors to use the system. Usually, that's fine, because the robot really does improve patient outcomes.

But there have been instances in the past, most notably with benign hysterectomies, where medical officials have determined that robotic surgery was being overutilized when simpler and cheaper approaches would lead to better long-term outcomes.

Taking both of these forces into account, I think Intuitive is fairly to slightly overvalued. If I didn't own shares, the price tag today wouldn't stop me from buying my first position. But as a current shareholder who has been with the company for over five years, I'm very comfortable sitting tight where I am.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.