Despite ongoing concerns about a rich valuation, shares of healthcare robotics and artificial intelligence (AI) stock Intuitive Surgical (ISRG 0.59%) had a stellar 2023. In fact, management just provided preliminary fourth-quarter 2023 earnings, as well as a first look at expectations for 2024, and investors were pleased. Intuitive stock just hit fresh all-time highs, and rallied nearly 40% over the last 12-month stretch.
The company believes it has ample opportunities left to address critical issues in healthcare: improving patient care, and labor shortages due to an aging population. AI and robotics are getting increasing attention in the 2020s as solutions to these problems, putting Intuitive in prime position to benefit. But is the stock really a good buy for 2024, or is it all just hype?
Closing out 2023 with a bang, ringing in 2024 with high hopes
Intuitive just reported preliminary results for Q4 2023, indicating that worldwide procedures performed with its da Vinci robotic surgery system increased 21% from 2022, and were up 22% for full-year 2023. In part, the stellar growth was due to lapping depressed results from the resurgence of COVID-19 in China at the end of last year.
Full-year 2023 revenue growth was pegged at 14% to $7.12 billion. The slower revenue trajectory was due to sluggish new da Vinci system placements -- 1,370 to be exact, up just 8% from new systems placed in 2022.
Additionally, to meet more hospital and surgery center needs due to a harder financing environment (as a result of higher interest rates), a greater portion of these system sales are being sold on an operating lease versus an outright sale. In 2023, 659 da Vinci systems were placed on lease terms (48% of the total), versus 38% placed on lease terms in 2022. A lease brings in less upfront revenue, so a higher mix tends to reduce revenue from selling a da Vinci system compared to years past.
At any rate, Intuitive thinks it will have another solid year in 2024, though the favorable comparables related to COVID lockdowns in China will be gone. At a recent investor event, management said about 2.2 million procedures were performed with Intuitive products in 2023. The guidance for worldwide da Vinci procedure growth is 13% to 16% in 2024, a solid initial indicator that Intuitive's gradual expansion will continue. This could be a great "get rich slowly" AI stock.
More AI to sustain Intuitive's trajectory
The general-purpose da Vinci Multiport robotic system has now been around for over two decades, but Intuitive is in the early innings of expanding its surgery platform with two new products: the Ion (for bronchoscopy, scoping of the lungs and airways) and the SP (or Single Port, used in narrow access applications).
The global installed base of systems is over 9,100, with the da Vinci Multiport at over 8,000. The da Vinci Multiport has slowed to a single-digit-percentage rate of growth. But just 530 Ion systems and 170 SPs leave plenty of wide open space for Intuitive to continue growing its installed base. Management has said it will also be focused on increasing installations in newer markets, like Japan, in 2024.
The company hinted at more innovation being developed behind the scenes, but Intuitive is about more than just selling robotic systems. It's a full-blown platform business these days, with a large catalog of training modules for surgeons learning to use da Vinci (including virtual reality to simulate using the machine).
Pre- and post-surgery diagnostics using cloud-connected analytical data are also a growing outlet. And Intuitive has invested in 3D imaging to help surgeons plan a patient's procedure, like imaging of a tumor to help define boundaries of the surgery and how it will be removed before ever making an incision.
Slower growth and higher valuation is still a concern
Of course, the ongoing worry with Intuitive stock is that its growth rate is slowing, and its shares trade for a premium. In fact, that premium price has been a nagging issue for years. As of this writing, the stock trades for just over 100 times trailing-12-month free cash flow and 86 times trailing-12-month generally accepted accounting principles (GAAP) earnings.
Data by YCharts.
There are some past financial effects still weighing down profitability. The aforementioned skew toward more da Vinci leases have pressured profit margins. And years of investment into the Ion and SP systems have only just begun to trickle in as profitable returns. This shows up particularly in free-cash-flow generation, which has been flat over the last three-year stretch even as revenue has risen more than 50%. The expectation is thus that free cash flow and earnings can ratchet back up in the years ahead.
Data by YCharts.
With Intuitive Surgical stock hitting fresh new all-time highs, the high price tag does look especially notable right now. Investors who have been eyeing this top healthcare technologist may want to wait for a pullback. But for those who want a quality healthcare play for the long haul, a small dollar-cost-average plan that builds a larger position in Intuitive over time can also work.
Either way, some prudence is in order as 2024 gets rolling. But don't overlook the performance of this long-standing pioneer in AI. Intuitive could be a big beneficiary of new healthcare technologies coming to bear in the decade to come.
