Intuitive Surgical (ISRG 0.59%) reported its third-quarter results after the market closed on Thursday. And investors didn't seem to like what they saw.
The robotic surgical-systems stock fell close to 8% in after-hours trading on Thursday. It was already down more than 20% from its peak coming into the Q3 update. Here's why the company is a screaming buy on the pullback.
Examining Intuitive's mixed Q3 results
Wall Street expected Intuitive Surgical to generate revenue of $1.77 billion in the third quarter. Instead, the company announced revenue of $1.74 billion. When a stock trades at a forward earnings multiple of over 42x, any miss is swiftly punished.
However, there was some good news in Intuitive's Q3 update, along with the slightly disappointing revenue. For one thing, the company's adjusted earnings of $524 million, or $1.46 per share, came in better than the consensus estimate of $1.41.
Worldwide da Vinci procedures increased by 19% year over year, well above Intuitive's 2023 guidance issued earlier this year of procedure growth between 12% and 16%. This healthy growth rate is arguably the most important metric for investors to note.
Intuitive Surgical also expanded its installed base to 8,285 systems. That's up 13% year over year. A larger installed base means more recurring revenue in the future. Speaking of recurring revenue, Intuitive recorded instruments and accessories revenue of $1.07 billion in Q3, a 23% year-over-year jump.
An encouraging trend that's easy to overlook
If you're considering selling Intuitive Surgical stock because its revenue was a little lower than projected, there's something to consider first. The company's Q3 results revealed an encouraging trend that's easy to overlook.
Intuitive placed 312 da Vinci surgical systems in Q3, higher than the 305 system placements in the prior-year period. What's important to note, though, is that 163 systems are under operating lease arrangements. That's a significant increase from the 113 systems under operating lease arrangements sold in the same period of 2022.
The bad news about this trend is that it makes Intuitive Surgical's revenue lower. System leases don't rake in as much upfront revenue as do system sales.
However, this short-term pain leads to long-term gain. Intuitive will make more money over a multiyear period from leases. The resulting higher recurring revenue also gives the company more reliable cash flow.
Buy this innovative stock on the pullback
I understand why investors are jittery in the current market environment. However, I think the after-hours decline for Intuitive Surgical was way overdone. The overall pullback in recent months has also gone too far.
There are three numbers that weren't in Intuitive's Q3 update that investors should keep in mind. The first number is 1.8 million. That's roughly how many procedures were performed using da Vinci systems last year.
The second number is 6 million. This reflects the volume of annual procedures that could be performed with Intuitive's current products and regulatory clearances.
The third number is 20 million. That's how many soft tissue procedures Intuitive expects to be able to target with its products and clearances under development.
Note that those figures exclude any procedures performed with Intuitive's Ion system. They also don't don't incorporate any growth, which is practically a given, considering the aging populations in many countries across the world.
Sure, Intuitive Surgical narrowly missed Wall Street's revenue estimate in Q3. However, the surge in operating leases bodes well for the company's future.
Intuitive's opportunities remain as big as ever. I think this innovative stock is a screaming buy on the pullback.
