The past six months haven't been kind to the investors in Intuitive Surgical (ISRG -0.94%), a leader in robotic surgeries. To add to that, shares slumped further after the company reported its first-quarter 2022 earnings about a week ago.

Looking at the company's business performance, however, it feels like the market may be overreacting to Intuitive Surgical's near-term headwinds, presenting a timely opportunity for long-term investors to take a closer look at the company. Let's review why.

Deftly navigating a tricky landscape

Intuitive Surgical, founded in 1995, pioneered the field of robotic-assisted surgeries. The company's da Vinci system provides surgeons an integrated suite of capabilities -- including 3D high-definition cameras, advanced surgical tools, monitoring stations, and software and analytics systems -- to perform complex procedures with exceptional precision. With its continuous innovation over the years, Intuitive Surgical has established itself as a clear leader in the industry.

COVID-19 has posed a variety of challenges to Intuitive Surgical's business. Patients delayed elective procedures during the pandemic. The resurgence of COVID-19 in parts of the world during the first quarter of the year increased hospitalizations and lockdowns and continued to impact surgical procedure volumes.

Additionally, hospitals are facing operational challenges due to labor shortages. Higher costs due to inflation, plus the rising cost of debt, are putting further financial strain on healthcare providers. Finally, supply chain issues are creating logistical and delivery challenges.

Doctor in operating room performing surgery using Intuitive Surgical instruments.

Image source: Getty Images.

Yet, the company reported strong results for the first quarter of 2022. Procedures using Intuitive Surgical's systems grew by an impressive 19% over the first quarter of 2021. Revenue increased to $1.5 billion, up 15% year over year. The company continued to invest heavily in innovation and growth. And as a result, net income as a percentage of revenue for the first quarter was lower at 24.6% relative to 33% in the first quarter of 2021. Adjusted earnings per share (EPS) was $1.13 compared to $1.17 a year ago.

The company still beat analysts' consensus estimates on both revenue and adjusted EPS, projected at $1.4 billion and $1.08, respectively. The company also raised the forecast for procedure growth from its previous estimate of 11%-15% to 12%-16% for 2022.

In the context of the multiple headwinds the company faces, this was a very good quarter that underscores the resilience of Intuitive Surgical's business model.

When in doubt, zoom out

Intuitive Surgical's beat and raise didn't appease the market. The company's shares tumbled by over 12% in a single day after reporting.

For long-term investors, however, this is a mere blip on the radar. Reviewing Intuitive Surgical's business fundamentals can help put things into perspective.

  • Innovation is in the company's DNA. Over the past two decades, the company has continuously improved its equipment and steadily expanded the scope of surgeries it can support, including abdominal and digestive, colorectal, cardiac, and gynecological procedures. The company is doing a good job of protecting that innovation with over 4,200 approved and 2,100 filed patents at the end of 2021. This intellectual property gives Intuitive Surgical a major edge over its rivals.
  • Intuitive Surgical uses a very powerful razor-and-blades business model. Each sale of the da Vinci system creates recurring revenue as hospitals keep ordering higher-margin proprietary surgical accessories, instruments, and services. Since 2015, 70% to 75% of the company's annual revenue has been recurring.
  • Hospitals make significant investments when they purchase da Vinci systems. This includes paying anywhere between $500,000 and $2.5 million to purchase the system, plus a significant amount of time in training the doctors and medical staff. Additionally, once the doctors get used to the convenience of using da Vinci, they don't want to go back to the old ways of conducting procedures or other systems. Once hospitals buy da Vinci, they're locked in and are likely to purchase newer versions of it along with other products the company has to offer.

The number of procedures using da Vinci has grown from 877,000 in 2017 to almost 1.6 million in 2021. Annual revenue during the same period has grown from $3.1 billion to $5.7 billion. What's especially impressive is that the company has produced this growth, overcoming the adversity of the COVID-19 pandemic.

Look past the stock price

As of this writing, shares of Intuitive Surgical are down by about 35% from their all-time high value in December 2021, trading at a relatively cheaper price-to-earnings valuation of about 53.

ISRG PE Ratio Chart

ISRG PE Ratio data by YCharts.

In the short term, the stock price doesn't always reflect the realities of the underlying business, and that seems to be the case with Intuitive Surgical. The company's fundamentals look solid. The current discount on its share price, sweetened further since the announcement of its first-quarter earnings, presents a great opportunity for patient investors to take a closer look at this long-term winner.