Robotic surgery has transformed the healthcare sector, improving patient treatment and outcomes. Intuitive Surgical (ISRG 0.69%) builds and sells the da Vinci, a robotic system used for various surgical procedures. The company's stock has also changed lives.
Intuitive Surgical has returned over 24,000% since 2000, dramatically outperforming the broader market and turning a $1,000 investment into nearly a quarter-million dollars.
These are the types of stocks investors should often look to buy when they pull back, as all stocks do. Today, Intuitive Surgical sits about 20% off its all-time high after a correction in the Nasdaq Composite (where it's listed). Should investors buy the stock on this dip?
Here is what you need to know.
A simple business model applied to new-age technology
Intuitive Surgical's product is highly complex, but the business model is very straightforward.
The company created the da Vinci system 25 years ago. Today, over 9,900 systems are installed in hospitals, including nearly 1,300 placed in 2024 alone. However, selling the system is only the beginning of the business model. The systems require ongoing supplies, maintenance, training, and repairs over their lifetime. Therefore, Intuitive Surgical makes most of its money from these recurring revenues (84% in 2024).
Over time, Intuitive Surgical has expanded beyond the da Vinci system. About six years ago, it launched Ion Robotic Bronchoscopy, which is used in oncology to conduct minimally invasive lung biopsies. Ion's installed base grew 51% in 2024 to over 800 systems. The company has also launched Intuitive Hub, a technology platform that automatically records videos for review and collaboration during surgeries.
Not every hospital can afford these high-end systems, but the business continues to grow swiftly. Intuitive Surgical expects to conduct 13% to 16% more procedures across its systems in 2025 than last year.
Why investors shouldn't sweat Intuitive's recent tumble
Sometimes, a picture can say a thousand words. Or, in this case, a chart. Intuitive Surgical's business has grown without interruption over the years, aside from the COVID-19 pandemic that temporarily disrupted the entire healthcare industry because of lockdowns:
ISRG Revenue (TTM) data by YCharts
The business is also highly profitable. Intuitive Surgical enjoys gross margins of over 67%, and cash profits continue piling up on the balance sheet. The company has over $4 billion in cash and no debt. There isn't much investors wouldn't like in Intuitive Surgical's business, and the stock's stellar long-term performance is icing on the cake.
So, why has the stock tumbled 20%? It's simple.
The market can sometimes be irrational, but it tends to appreciate a winning stock, especially in a bull market. Intuitive Surgical routinely trades at a premium to the broader market, with an average price-to-earnings (P/E) ratio of 61 over the past decade. However, the price got a bit excessive late last year. The P/E ratio ran past 90 before its recent decline.
Analysts estimate Intuitive Surgical will grow earnings by an average of 14% annually over the long term. It's hard to justify such a high valuation without faster growth, even if you love the business.
NASDAQ: ISRG
Key Data Points
Should investors buy the stock?
The key question is whether Intuitive Surgical has declined enough that investors can reasonably buy it. The PEG ratio is a quick and easy litmus test for this question. It compares a stock's valuation to its earnings growth. Generally, I will buy quality stocks at PEG ratios up to 2.0 to 2.5 (lower means better value).
Buying stocks at excessive valuations risks subpar returns if the business doesn't perform. The stock may languish until the price decreases or earnings catch up to the valuation. Expensive stocks are also sold off more aggressively in market downturns. That's why Intuitive Surgical has declined further than the Nasdaq Composite index in this recent correction. It's about valuation, not the business.
Today, Intuitive Surgical's P/E ratio (76) still translates to a PEG ratio of 5.4. At these prices, it's hard to see the stock doing well unless the company dramatically outperforms expectations. Given the valuation risks, investors are probably better off sitting tight and waiting for a better entry point.
