Is Intuitive Surgical Stock a Buy Now?

Robotic-surgery leader Intuitive Surgical's (ISRG -0.55%) stock has been an incredible long-term winner. Since its initial public offering (IPO) in 2000, share prices are up over 10,800% -- a testament to investing in industry disruptors that also improve the world. 

However, Intuitive Surgical's results have been a bit more inconsistent in recent years. Competition for robotic surgery is heating up, but the biggest hurdle here has been the pandemic. Growth in the second quarter of 2022 slowed to a trickle as the company tries to navigate supply chain and COVID-19 surgery restrictions in some markets. It remains an industry leader, but is Intuitive Surgical a buy now?

Slowing growth from supply chain issues

Intuitive Surgical's stock has been in free fall in 2022. The price has dipped nearly 40% year to date with just a week left in July, perpetuated by slowing growth. 

Q2 2022 was a disappointment, with revenue increasing only 4%. The reason? Only 279 da Vinci surgery systems were placed in the last three months, compared with 328 in the same period a year ago. Additionally, of the 279 systems placed, 117 of them (or 42% of the total) were sold on an operating-lease or usage-based agreement -- compared to just 33% of total systems placed a year ago on an operating-lease or usage-based agreement. As a reminder, Intuitive realizes revenue from this type of placement over time, versus a larger upfront payment for an outright sale. 

A few months ago, management warned that supply chain issues (specifically, not obtaining enough components to build machines), inflation in shipping costs, and COVID-19 lockdowns in some markets were going to hurt system placement in Q2. While it was more severe than expected, the good news is that Intuitive's total installed base of da Vinci systems is still on the rise.

More importantly, demand for robotic-assisted surgery is also increasing. System-placement sales are now down year over year through the first half of 2022, but ongoing sales of instruments and services are steadily growing. 

Data source: Intuitive Surgical. YOY = year over year.

A high price for good reason

There are a few upshots to the Q2 letdown. First, revenue growth could accelerate in 2023 because this current year is setting such a low bar to clear. As Intuitive laps its depressed number of da Vinci system placements next year, revenue expansion could be rekindled. 

Intuitive Surgical's profitability (as measured by earnings per share and free cash flow per share) has also dipped from its all-time peak last summer. The company is constantly investing in new system innovations to increase the number of procedures surgeons can perform. Over time, I expect profitability to also make a recovery and help Intuitive's stock return to its market-beating ways.

Data by YCharts.

Finally, there's the balance sheet, which had $8.18 billion in cash and investments and zero debt as of the end of June 2022. This is an exceptionally strong healthcare technologist built for long-term profitable growth. 

After selling off hard this year, Intuitive Surgical stock trades for 47 times enterprise value to free cash flow. It's the cheapest valuation of the company since the pandemic started, but it's still a premium price tag that assumes the company will be a steadily growing business for the foreseeable future. 

Intuitive Surgical has a long runway of growth ahead (most surgeries around the world are still performed without any robotic assistance), and it's still early on in its transition to a "value stock" ($500 million worth of shares were repurchased last quarter). Given this, I'm still in accumulation mode. If you decide to buy, remember to start small and make the stock part of a well-diversified portfolio that includes shares of other healthcare companies and stocks from other sectors of the economy.