Shares of Intuitive Surgical (ISRG -0.06%) have gained momentum following strong first-quarter results. The stock is up nearly 30% this year.
The company continues to benefit from the global trend toward minimally invasive surgeries powering demand for its da Vinci robotic surgical systems. A positive growth outlook supported by overall solid fundamentals offers a good setup when evaluating any investment opportunity.
That being said, with Intuitive Surgical stock currently trading at its all-time high, should investors buy now, or are there reasons for caution? Here's what you need to know.
Reasons to buy or hold Intuitive Surgical
Since the launch of Intuitive Surgical's very first da Vinci surgical system in 2000, the company's effort has always been to improve patient outcomes while creating efficiencies in the healthcare operating process. By all accounts, the devices now represent the industry gold standard and are still growing in terms of global adoption.
In the first quarter (for the period ended March 31) Intuitive grew its installed system base by 14% to 8,887 systems from the period last year. The number of procedures performed worldwide was up by a wider margin at 16%, indicating higher utilization on average.
This is important as Intuitive's business uses the razor-and-blade model, wherein it counts on not only selling the initial high-ticket equipment but also the necessary single-use tools and instrumentation that represent over half of total sales. Simply put, the more devices there are on the market, the greater the leverage of the related products and services.
Q1 revenue reached $1.9 billion, up 11% year over year, while non-GAAP (adjusted) earnings per share of $1.50 increased by 22% from the prior-year quarter. Steps to control costs while capturing a favorable pricing mix through the sales of newer devices have added to profitability. The trends in this quarter were strong enough for management to hike its full-year 2024 procedure growth guidance to between 14% and 17% compared to a prior range of 14% to 16%.
Image source: Getty Images.
Maybe the biggest development this year was the clearance by the Food and Drug Administration (FDA) for Intuitive's newest-generation da Vinci 5. The system marks a leap in innovation by integrating new artificial intelligence (AI) and machine learning capabilities.
The company notes the new model brings 150 design advancements and 10,000 times the computing power over the most widely installed Vinci Xi platform. The expectation is that da Vinci 5 can support higher margins and ultimately represent a growth tailwind over the next several years.
Overall, the headline numbers from Intuitive Surgical are solid and help explain the ongoing rally in the stock. Investors who are confident the trends will continue having plenty of reasons to keep holding shares or consider adding to a position.
Reason to sell Intuitive Surgical
As compelling as a company's long-term outlook may appear, it's always worthwhile to maintain a critical eye. In the case of Intuitive Surgical, the main concern starts with the stock currently trading at 68 times its average Wall Street earnings-per-share (EPS) forecast for 2024 of $6.29. Shares also trade at 21 times its sales over the trailing 12 months.
ISRG PS Ratio data by YCharts.
The interpretation here is that the market assigns the company a high premium given its leadership and competitive moat. In other words, for all the positives that make Intuitive Surgical a great company, those factors are hardly a secret, with the market bidding up shares.
While that doesn't mean the stock is necessarily overvalued or needs to sell off immediately, the objectively pricey valuation does imply that expectations are very high -- the challenge for Intuitive will be to keep impressing the market.
Ultimately, a bearish case for the stock to justify a sell-now decision would need to nitpick around the margins for evidence growth is faltering or that the latest da Vinci 5 won't live up to its hype. That's a stretch I'm not willing to make.
Is Intuitive Surgical right for your portfolio?
The attraction of Intuitive Surgical is the company's unique positioning at the intersection of high tech and healthcare. The valuation is a touch expensive but well justified given the growth potential and underlying financial strength. In my view, this is the definition of a blue chip stock investors should consider buying and holding for the long run.
