Intuitive Surgical (ISRG -0.44%) is the world's pre-eminent robotic surgery company, and its stock is a habitually strong performer. Over the last five years, its return of nearly 370% has crushed the S&P 500's rise of 101%. And, if its annual progress in getting more and more hospitals worldwide to install its Da Vinci robotic surgical suites is any indication, it'll continue to be a dominant player in the minimally invasive surgery space.
After its stock split in September, Intuitive's share price was slashed and currently sits at around $340. Could it possibly reach $500 by the end of 2022?
Business as usual probably won't be enough
To reach $500, Intuitive's stock would need to grow by more than 52% over the next year. Over the last 12 months, the stock expanded by more than 34%, so merely replicating recent performance wouldn't be enough to hit the target. But investors can probably still count on the company's growth rate to remain at a moderate to fast pace.
One of Intuitive's biggest strengths is that about 77% of its revenue is recurring, as hospitals that purchase Da Vinci suites require both surgical tools as well as routine maintenance for their robots. The beauty of Intuitive's business model is that customers are also heavily incentivized to stick with the Da Vinci platform instead of switching to a competitor. Because it takes surgeons and other operating room staff plenty of time to learn how to use robotic surgical tools, changing to another system would require another round of training and another set of sunk costs.
There might still be a way for the stock to top $500. If Intuitive announces exciting new initiatives or especially favorable quarterly results, the market could change its appraisal of the company's value to reflect heightened expectations of future revenue growth.
Valuation might still carry the day
Let's quickly crunch some numbers to map out what would need to happen financially for Intuitive Surgical's stock to get to $500.
Over the last five years, Intuitive grew its diluted earnings per share (EPS) from $2.08 to $4.64, which is its trailing EPS presently. That works out to be a compound annual growth rate (CAGR) of 17.41%. Right now, the stock's trailing price-to-earnings (P/E) ratio is around 74, but in June 2021 it was as high as 94.71.
If the stock's P/E multiple stays basically the same over the next year, and the company's operations expand such that its EPS increases at the same rate as in each of the last five years, its shares could have a price of around $403.
But, if the P/E rises to where it was in June, shares would be priced at nearly $516. Its valuation has burgeoned to that level a couple of other times, including most recently in December 2020, so such a change is possible, even if it isn't very likely. Last time, the decisive factor was probably when Intuitive announced the creation of its $100 million venture capital fund for minimally invasive care technologies in late October 2020.
Nonetheless, it's hard to imagine that the business will come up with anything as inspiring to the market over the next 12 months.
$500 is just a number
In sum, I (unfortunately) rate it as improbable that Intuitive Surgical will reach $500 next year, but I firmly believe that it's still a great stock to own or consider purchasing.
Between its strong economic moat, favorable financial performance, and a consistently innovative product lineup, the company is well positioned for the next decade and beyond. And, for savvy investors, all of that is far more important than whether its stock hits an arbitrary price target.