Intuitive Surgical (ISRG 0.58%) stock is rallying following its third-quarter 2022 earnings update. It's not that it was a particularly good report (it was decent), nor is it because the stock has become cheap thanks to the bear market this year (shares trade for 79 times free cash flow and 61 times earnings per share).  

Rather, Intuitive seems to be back on the rise because management shelled out a substantial amount of cash for stock buybacks last quarter. This is still a growth business, one that continues to deal with effects from the pandemic, but Intuitive Surgical is growing up. 

Cash returns help the pain go away

Intuitive Surgical's revenue increased 11% year over year to $1.56 billion in Q3 2022. This consisted primarily of a 9% decrease in da Vinci robotic-assisted surgery system placements (305 this past quarter, versus 336 in the same period of 2021), offset by a 20% increase in the number of procedures performed.  

On this latter point, Intuitive's installed base of da Vinci systems increased to 7,364 in Q3, up from 6,525 a year ago. This steadily rising number of robots helping to perform surgeries will almost certainly be the company's main growth driver in the years to come.

That's because these days, most of Intuitive's sales come from instruments and accessories -- 56% of revenue in Q3, to be exact. Instruments eventually need replacing, and there are non-reusable components that need to be purchased for surgeries as well. Then there's recurring services, 17% of revenue in Q3. This is made up of training, software tools, and the like.  

Growth in the latest quarter was also affected by rolling economic lockdowns in Asia to try to control the pandemic. Additionally, worry this year has been mounting as profit margins contract. Intuitive has been spending fairly aggressively in 2022 to support manufacturing expansion and hire new talent. Research and development expenses are also up. The result has been a dramatic decline from last year's free cash flow generation peak.

Chart showing Intuitive Surgical's free cash flow spiking in 2021 and then falling.

Data by YCharts.

To help calm investor nerves, Intuitive management executed a $1 billion share repurchase plan in Q3. This was in addition to the $607 million worth of stock repurchased in the first half of 2022. The result? Earnings per share fell 13% year over year in Q3. Absent the buyback, earnings per share would have fallen much more. The company has another $2.5 billion remaining on its current repurchase plan.  

Is Intuitive still a growth company?

There was more good news regarding an early look at 2023. On the earnings call, Intuitive's management said expenses should start to moderate next year as the company completed some of the spending on expansion. The pace of new hires has also slowed. Basically, based on this early outlook, we can expect a rally in Intuitive's profit margins to begin soon.  

But let's not focus only on short-term profit margin changes. Though this business model is maturing, Intuitive is still a growth business. For example, the company's newer Ion surgery system is just starting to get going. 50 Ion systems were placed, bringing the total installed base up to 254. Total procedures using Ion in Q3 were about 6,400, a 211% increase from last year. As Ion gets approval in new markets, this could help revenue growth accelerate again.  

Overall, though, Intuitive's days of hypergrowth are likely behind it -- but that's OK. The business is firmly in the lead in robotic-assisted surgery, profit margins are healthy and due for a rebound, and there's ample cash on the balance sheet ($7.39 billion at the end of September, and no debt). More share buybacks can be expected too.

There's still a lot to like long-term, though this stock fetches an elevated price tag right at the moment. Intuitive Surgical stock trades for 42 times earnings based on next year's estimates (which factor for those lowered expenses). Tread lightly here when deciding which stocks to buy, but this remains a high-quality healthcare stock for the long haul.