The stock market, particularly in the technology sector, has seen a widespread sell-off thus far in 2022. Investors have a case of jitters due to several macroeconomic factors like inflation, interest rate hikes, and international tensions. A general sell-off typically causes many high-quality stocks to become undervalued, offering savvy investors an opportunity to accumulate undervalued shares.
Robotic-assisted surgery is not science fiction; it is happening now in hospitals all across the world. This type of surgery is less invasive, and therefore recovery times are quicker, hospital stays are shorter, and there are fewer complications. Intuitive Surgical (ISRG -0.50%) is the dominant player in the space, with an 80% market share. Intuitive's platform, the da Vinci Surgical System, is installed in 6,730 locations globally.
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Impressive Q4 results
Intuitive released fourth-quarter and full-year results on Jan. 20 that were impressive despite headwinds associated with COVID-19. Intuitive derives most of its revenue from recurring sources, namely instruments and accessories, and services for the machines (sometimes called the "razor and blades" model). In the fourth quarter, 54% of sales were from instruments and accessories alone. This means that when the number of procedures rises, revenue will also increase.
Over the long term, this is extremely positive. Our aging population will continue to require more operations. COVID has stunted non-emergency surgery in the short term because hospitals are full of COVID patients. Even so, fourth-quarter 2021 total procedures performed grew 19% over the prior-year period. Look for this number to accelerate when we can move past the worst of the pandemic.
The company also has a sizable international opportunity for expansion. In the fourth quarter, 235 systems were installed in the U.S., and 150 were installed outside the U.S. This compares to 130 installed outside the U.S. in the year-ago quarter.
Revenue for the 2021 fourth quarter came in at $1.6 billion, besting the year-ago result of $1.3 billion by 17%. In addition, the company shipped 18% more machines than in the year-ago quarter. This is a crucial metric as each new machine not only cements Intuitive Surgical as the gold standard in the industry but will provide recurring revenue in future periods.
Intuitive continues to post impressive margins. In the fourth quarter, the company posted a net margin of 25% under generally accepted accounting principles (GAAP) and an operating margin of 29%, also on a GAAP basis. These quality margins allow the company to continue to increase its cash and investments on hand. Intuitive ended 2021 with $8.6 billion in cash, cash equivalents, and investments on hand. This amounts to nearly 9% of the current market cap. The company has no long-term debt, allowing it to book a small amount of interest revenue each period.
The stock price
Since Intuitive shares had a three-for-one split in October 2021, the stock has been on a roller coaster. It has traded as high as $369 and now trades near a 52-week low. The recent price action appears to be more correlated to the broader market sell-off than any change in fundamentals for the company. This is just the opportunity that many investors have been waiting for.
ISRG data by YCharts.
The company now trades at a ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) that is in line with its valuation before the March 2020 market crash, offering investors a more attractive entry point than at any time in 2021.
ISRG EV to EBITDA. Data by YCharts.
Intuitive is ripe for the picking
While many investors are selling this year, savvy investors hunt for bargains. They are looking for stocks that have dropped in sympathy with the overall market yet have terrific fundamentals and long-term potential.
Intuitive Surgical is one of these stocks. The company continues to grow revenue, procedures, and machine placements despite the COVID headwinds. In addition, the balance sheet is rock solid. The stock now trades nearly 25% down from its 52-week high. In addition, the EV-to-EBITDA ratio is now similar to the ratio just before the March 2020 market crash. This offers long-term investors an opportunity to accumulate shares in this strong company on market weakness.
