Intuitive Surgical (ISRG 0.02%) is an innovative company that is using robotics to revolutionize the healthcare industry. Its state-of-the-art da Vinci system is taking surgical precision to a new level, and doctors are noticing. The company boasts that the da Vinci system is used once every 17 seconds. Shares have been on a tear in 2024, up 30%, over three times the return of the S&P 500.
The company released outstanding earnings on July 18, and shares spiked over 9%. So, how exactly does Intuitive Surgical make money, and what are the prospects for its shares going forward?
Intuitive Surgical's robots are pioneers in the operating room
Intuitive Surgical has developed cutting-edge products that assist doctors in performing minimally invasive operations. Intuitive's leading product is the da Vinci, a robotic surgical system that helps perform complex operations with unmatched precision in various treatment areas.
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Key Data Points
Doctors covet the system because it greatly reduces human error in operations. Its robotic arms hold the cutting tools and instruments rather than the surgeons themselves. The surgeon operates the arms remotely, viewing the operating area through eyepieces connected to two high-definition 3D cameras.
The robotic arms can make smaller and more precise cuts and eliminate the risk of tremors that might affect a human hand. Additionally, the camera can give a magnified view of the operating area, superior to that of the naked eye, allowing for better decision-making.
These benefits reduce complications and lead to faster patient recovery times.
Key metrics show dazzling performance in Q2 earnings
Arguably, the company's most important metric is growth in the number of procedures using its systems. In Q2, procedure growth for the da Vinci was 17%. Procedures with the company's other product, Ion (specifically used for lung biopsies), grew 82%. As more doctors see the product used, this drives further adoption of both systems. Likewise, Intuitive expects continued procedure growth throughout the rest of the year.
More procedures also increase sales of its instruments and accessories, which are its largest segment by revenue. These are the surgical instruments the da Vinci's arms hold, and surgeons must replace them after use, making them a necessary recurring expense for facilities.
Intuitive has steadily grown revenue and is on track to increase by year-end. Beyond revenue, the company is persistently increasing its recurring revenue as a percentage of total revenue. Recurring revenue is contractually obligated, which builds revenue stability and improves earnings quality. As outlined in the table below, Intuitive has maintained this success over the past few years.
| Intuitive Surgical's Revenue | ||
|---|---|---|
| Period | Total Revenue | Recurring Revenue as a % of Total Revenue |
| 2021 | $5.7 billion | 75% |
| 2022 | $6.2 billion | 79% |
| 2023 | $7.1 billion | 83% |
| H1 2024 | $3.9 billion | 86% |
Chart by Author. Source: Company filings.
Not only is the industry leader hitting revenue measures, but it's also seeing such success trickle to the bottom line. Overall, adjusted earnings per share increased by 19% from the previous year and showed an earnings surprise of 16% compared to estimates.
Further, the company's newest product, the da Vinci 5, is seeing higher demand than analysts expected. It installed 70 of these systems at healthcare facilities in Q2, a large increase from the eight installed in Q1. Intuitive is increasing manufacturing capacity to meet it this demand, adding 250 to 300 manufacturing employees in the quarter.
These results pleased investors and sent shares higher immediately after the release.
Spectacular fundamentals backup Intuitive's valuation
The company's valuation is high, with a forward price-to-earnings (P/E) ratio of 67. This far exceeds the S&P 500 Health Care Sector's forward P/E ratio of 19. However, for some this is justified. The company has a solid operating margin of 26%, no debt, and over $4.7 billion in cash and short-term investments.
The comfy financial position allows Intuitive to acquire other companies to increase efficiency or expand its offerings, which the company has done previously in 2019 and 2020, buying Orpheus Medical and part of Schölly Fiberoptics. Intuitive also has full power to create a more optimized capital structure by adding debt to reduce its cost of capital if interest rates fall.
There are significant barriers to entry for potential competitors. The da Vinci is currently the only surgical robot approved by the U.S. Food and Drug Administration (FDA) to perform various procedures. Developing a competing product and getting FDA approval is costly. The average selling price of a da Vinci robot is between $800,000 and $3.1 million, implying how expensive they are to make.
It would also be difficult to convince doctors to try a new product that is less established, as such a decision could increase exposure to malpractice liability, further sealing Intuitive's moat.
Analysts expect the robotic surgery market to more than double from 2023 to 2033. In addition, the robotic surgery consumables market could grow even faster, potentially tripling by 2033 to reach over $15 billion.
This is another great sign for Intuitive, as this is where it makes most of its revenue. Intuitive has a massive advantage (it controls nearly 60% of the market) in this industry right now and has the opportunity to capitalize on this growth.
Purchasing shares in this company with incredible fundamentals, despite its lofty valuation, is a bet that investors should consider as a "set-it-and-forget-it" investment.
