With its shares up by 45% over the last 12 months, Intuitive Surgical (ISRG -1.19%) is once again proving its growth stock chops to its shareholders. The robotic surgery company is rapidly recovering from the headwinds it experienced due to the pandemic, and it's aiming to grow its business again at full speed.
What's more, its runway for growth is incredibly long. But with such an optimistic setup and no obvious obstacles at the moment, it's no wonder the stock's valuation is a bit heady. So is Intuitive Surgical stock too hot to touch, or is it worth buying right now? Let's analyze and find out.
The pandemic-induced downturn isn't gone just yet
Over the last few years, Intuitive's story hasn't changed much, and its razor-and-blade business model is as stellar as ever. It developed the the da Vinci robotic surgical suite, which is a surgeon-controlled set of robotic arms designed for minimally invasive general, bariatric, and urology surgeries.
The company gets paid first when its customers buy the system, which has a sticker price of up to $2.5 million. Then it gets paid again when they purchase maintenance contracts, spare parts, new surgical toolheads, scanning systems, training programs, and other consumables and accessories. Each procedure costs between $600 and $3,500 in consumables, accessories, and instruments. That long tail of revenue is how Intuitive brought in $1.7 billion in sales during the first quarter, an impressive 81% of which was from those aforementioned recurring revenue sources.
Overall, that business model works swimmingly. Over the past 10 years, Intuitive's quarterly net income rose by 123%, topping $355 million. But continued growth rests on its ability to keep shipping da Vinci systems to new customers, and also on customers actually consistently using the systems to perform surgeries. The start of the pandemic also disrupted that dynamic as hospitals were forced to cancel or defer surgeries to free up beds and other resources for coronavirus patients.
Nonetheless, between 2019 and 2022 the number of procedures performed with da Vinci systems grew at a compound annual rate of 15%, exceeding 1.8 million for 2022. Now, that growth rate is accelerating a bit and may continue doing so.
Management is still citing problems caused by COVID in both China and the U.S. as being a drag on procedure volumes, even as procedure volume rose by a healthy 26% in Q1 compared to a year prior. As those lingering pandemic-derived constraints ebb further, it's hard to see how there might be fewer procedures being performed in the near term.
This isn't a stock for the price-sensitive
Intuitive's core business was remarkably durable during the pandemic's height, and the global rollout and utilization of its surgical suites is almost guaranteed to continue. It's strongly profitable, has no debt, and holds $4.7 billion in cash and equivalents to invest in developing new systems or penetrating markets more effectively.
Intuitive's runway for growth remains incredibly long, and there aren't any competitors gaining on it, or even anywhere in sight within its target surgery markets. This is a good growth stock to buy if you want exposure to significant upside over the next decade and beyond, and there aren't any blinking red warning lights to speak of in terms of its risk.
The catch is that the stock's valuation makes it extremely expensive, which entails a small to medium risk for shareholders. Its price-to-earnings (P/E) ratio is 73. The market's average P/E is just under 25. If the business fails to expand at the rapid and enduring pace that the market is presently pricing in, people who buy it today might see their shares lose value. Likewise, if frothier valuations revert toward the market's mean as a result of macroeconomic issues or other factors, Intuitive Surgical's stock might suffer a few dents like it did during 2022's bear market.
In the long term, however, this company is positioned to keep winning. Investment in research and development (R&D) should continue to steadily expand its offerings in terms of robotic toolheads, imaging stations, and software. This will likely open the door to massive selling opportunities to existing customers, not to mention enticing new ones. And there's no rule that says high valuations doom shareholders to painful corrections.
Given that Intuitive's core business was able to keep growing over the last few years, it's entirely possible that it'll live up to the market's expectations. If you can accept that it's an expensive stock, it could be a smart option to buy now and hold forever.
