Intuitive Surgical (ISRG -1.69%) hasn't defied this year's bear market. In fact, the leader in robotic surgery has underperformed the S&P 500 Index. Intuitive has dropped almost 40% while the benchmark index has declined 21%.
Why the pessimism about this innovative growth stock? The pandemic pushed hospitals to focus on caring for coronavirus patients. That meant they postponed many non-invasive procedures. And in some cases, they put plans on investing more in surgical robots on the back burner. Still, Intuitive managed to keep on growing. And the latest earnings report offered us a view of what may be ahead. So, now, is it time to buy this beaten-down stock?
Coronavirus impact
First, a bit about the challenges Intuitive has faced. As mentioned above, peaks in coronavirus hospitalizations have weighed on revenue. Hospitals postponed surgeries using Intuitive's flagship Da Vinci system.
You might wonder why that's a problem. After all, the hospital already bought or leased the Da Vinci. But Intuitive doesn't only generate sales from selling or leasing the systems.
The company actually makes more revenue by selling the disposable instruments and accessories needed for each procedure. So, when a procedure is postponed or cancelled, Intuitive loses out on revenue. Another problem is that, during times when hospitals are overwhelmed with coronavirus cases, they usually don't prioritize ordering new surgical systems.
These aren't the only problems Intuitive has faced. This year, higher inflation has lifted the prices of components. And supply chain issues have delayed deliveries. So, these have become additional headwinds for Intuitive.
In spite of these issues, however, Intuitive has continued to grow its number of systems placed in hospitals worldwide. They now total 7,364. And in the third quarter, Intuitive's revenue and number of procedures both climbed in the double digits.
When procedures increase...
The number of procedures is particularly important. We've seen that a decline in procedures hurts revenue due to lower orders for tools needed for the surgeries. But when procedures increase, so do the orders for instruments and accessories. In the quarter, Intuitive's instruments and accessories revenue advanced 15%.
So, hospitals' ability to schedule surgeries directly impacts Intuitive's revenue. The company says coronavirus disruptions remain a risk. But there's reason to be optimistic that the worst may be over. Intuitive increased its annual forecast for procedure growth to the range of 17% to 18%. That's up from a forecast of 14% to 16.5% growth.
There's another sign that Intuitive is confident about the future. The company repurchased $1 billion of its common stock in the quarter. And Intuitive has the authorization to purchase as much as $2.5 billion more.
All of this is relatively near term. Now let's look a bit farther out into the future. And here, there are more reasons to be positive about Intuitive.
The global market for robotic surgery is set to advance at a compound annual growth rate of more than 10% through this decade, according to BIS Research. Intuitive holds nearly 80% of the market. And the cost of the robots and the fact that most surgeons train on them make it likely hospitals won't switch over to a rival system.
Should you buy Intuitive?
Considering all of this, is now a good time to buy Intuitive? The company has seen improvement in the supply chain situation. Coronavirus impact in China has lessened, but regional lockdowns still are a factor that may hurt procedures there. Rising inflation also is an ongoing risk.
That said, Intuitive's procedure and revenue growth are good signs. And the long-term picture remains bright. The company also should benefit from investments it's made in infrastructure and the overall business. In fact, Intuitive expects operating expense growth to slow next year.
Today, Intuitive's shares trade for 46 times forward earnings estimates. That's compared to more than 72 at the start of the year. This looks like a great opportunity to get in on shares of this innovative healthcare player -- and hold on to benefit from growth over the long haul.
