While Wall Street analysts are estimating that shares of Intuitive Surgical (ISRG 0.59%) could fall by 9% over the next 12 months, its gain of 63% over the last 12 months suggests there may be something they're missing. With hospitals using its surgical robots at increasing rates around the world, and with the pandemic's headwinds fading, it's hard to see why analysts are down on Intuitive Surgical's near-term future.
Let's take a moment to examine the challenges facing the company to see what's going on and whether it's more likely to rise or to fall over the coming year or so.
What might drive a fall in its share price?
Given that the company has no major competitors, and that management hasn't identified any major barriers to the execution of its business plans in the near term, an outright collapse in the stock is probably off the table. There is one big risk that analysts are probably thinking about with Intuitive Surgical stock, however: its valuation. Its price-to-earnings (P/E) ratio is above 90, which is quite high compared to the healthcare sector's average P/E of 25.
It's easy to see why investors are willing to bid up the price of its shares so much. Over the past 10 years, its quarterly net income climbed by 123%, leaving it at $355 million in the most recent quarter. And since its plans to penetrate the global market for its Da Vinci robotic surgical units still have a long way to go, with 7,700 units deployed around the world already, over the coming decade and beyond its bottom-line growth should be just as fierce as in the past.
But high valuations can precede brutal reversions to the mean in the event that a company's growth is a bit slower than what's expected -- even if there's a valid reason for the slowdown. Plus, there are still a few lingering obstacles caused by the pandemic, like supply chain challenges and healthcare labor shortages that prevent surgeries from taking place.
While these bumps in the road might be relatively small in the grand scheme of things, they could still send the stock for a bit of a tumble. So while investors shouldn't take Wall Street's dim estimates as a guarantee, they're entirely plausible, if a touch too pessimistic.
The stock is more likely to keep going up
Regardless of what Wall Street is saying, there's a bigger chance that Intuitive's stock will continue to rise rather than fall. Here's why. First, management is anticipating that procedure volume performed by its robotic systems will rise by as much as 21% this year after being used for more than 1.8 million surgeries in 2022. That was driven by more utilization of the Da Vinci system as a general surgery aid rather than for specialties like urology.
If procedure volume rises by that much, it'll be growing faster than its rate of growth between 2019 and 2022, when there were an average of 15% more procedures annually compared to the prior year. With Intuitive's razor-and-blade business model, more procedure growth equals more customers that will need to buy more of the company's maintenance services and spare parts. And 81% of its revenue is derived from those recurring sources, so the impact could be significant.
Furthermore, the company's China segment was heavily disrupted by the pandemic in the early part of this year. But moving forward, that level of disruption will fall, and perhaps quite soon. If procedure volume resurges in China with the same intensity of its tapering, it'll be a short-lived but powerful tailwind that could send the stock even higher. Investors will likely need to wait until the business' Q2 earnings in late July to see what's going on.
In fact, even though its valuation is high, the long-term prospects for growth that Intuitive has from penetrating global markets mean that it is probably a better idea to be buying shares of its stock rather than selling them. The company hasn't shown any indication of reaching the bottom of its markets yet, and with no debt and little in the way of stumbling blocks, even if its shares don't rise much in the near term, in the long term it's very likely to keep growing and rewarding its investors.
