Intuitive Surgical (ISRG +2.81%) is one of the best success stories you'll find in the healthcare sector. The company has helped patients worldwide as a pioneer in robotic-assisted surgery, and its business success has driven the stock to returns of over 25,000% since its initial public offering (IPO) in 2000.
The company's flagship da Vinci system remains its crown jewel today and continues to drive profitable growth from an increasingly larger installed base. Yet the stock has wavered recently, currently sitting in the middle of its 52-week range. Is this a dip worth buying for the next five years, or is Intuitive Surgical losing its edge?
Here is where the stock may go over the coming years.
Image source: Intuitive Surgical.
A hefty valuation could be weighing on the share price
Intuitive Surgical currently trades at a price-to-earnings (P/E) ratio of 75. Meanwhile, analysts estimate the company will grow earnings by an average of just over 13.8% annually over the long term. The company has a sterling reputation for its long track record of business and investment performance; however, it's challenging to justify such a high valuation for the growth Wall Street anticipates.
At the same time, the broader S&P 500 healthcare sector is trading near the low end of its 52-week range, which suggests that healthcare stocks aren't particularly popular at the moment. Although the broader stock market is near all-time highs, individual stocks, entire industries, or market sectors may be hot or cold at any given time.
Sometimes, the simple explanation is the correct one. Market sentiment is working against the healthcare sector, so Intuitive Surgical's expensive valuation appears to be weighing on the stock. It happens.
Intuitive Surgical still has more growth ahead
That said, market dynamics can and will change over time, and five years is a considerable amount of time. Top-line and bottom-line growth tend to drive a stock's long-term performance, so it's essential to understand where a company stands in its business journey.
Intuitive Surgical currently sells two systems: its da Vinci system, available in single- and multi-port configurations, used for a variety of soft tissue procedures, and the Ion, the company's newer system, used for performing minimally invasive peripheral lung biopsies.
As of June 30, there are 10,488 da Vinci systems installed worldwide, generating recurring revenue for Intuitive Surgical as these systems consume supplies and require servicing over time. The global da Vinci installed base performed 17% more procedures in Q2 than the prior year, indicating that growth remains relatively healthy (no pun intended).
NASDAQ: ISRG
Key Data Points
The company estimates its core (da Vinci) addressable market at approximately 8 million annual soft tissue procedures, based on the da Vinci systems' current regulatory approvals and capabilities. Considering da Vinci systems will perform over 3 million procedures this year, it seems that Intuitive Surgical still has room for solid short- and medium-term growth, and that's speaking to organic growth, as in more installed systems and procedures.
As a bonus, Intuitive Surgical has zero debt, is highly profitable, and has $4.5 billion in cash. Management could lean more into share repurchases to help grow its earnings per share. Given all of this, the 13% annualized growth rate Wall Street anticipates seems achievable.
Where might the stock price be in five years?
Investors can extrapolate this growth rate to see where the stock may trade over time. Applying that 13.8% growth rate to Intuitive Surgical's trailing-12-month earnings per share of $6.82, the company's earnings would grow something like this:
- 2026: $7.76
- 2027: $8.83
- 2028: $10.05
- 2029: $11.44
- 2030: $13.02
The stock has averaged a P/E ratio of 62 over the past 10 years, so here is where the stock may trade in five years, based on its current valuation and some other scenarios:
| Price-to-Earnings Ratio | July 2030 Share Price | Total Upside or Downside |
|---|---|---|
| 75 | $976 | 91% |
| 65 | $846 | 66% |
| 55 | $716 | 40% |
| 45 | $586 | 15% |
| 35 | $456 | (11%) |
Calculations by author.
If Intuitive Surgical reverts closer to its long-term averages, the current valuation could easily continue to weigh on the stock. Therefore, investors may want to err on the side of caution and focus on the lower valuations. If the broader market stumbles, Intuitive Surgical could even drop to a P/E ratio below its long-term norms. It's always good to build a margin of safety into these exercises.
Intuitive Surgical hasn't lost its edge, but it is an overvalued stock. Investors may want to prepare for a five-year period in which the stock delivers underwhelming returns, in case Intuitive Surgical's valuation returns to a more appropriate level for its expected growth.
