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Intuitive Surgical (ISRG) is a richly valued magnificent growth stock I last reviewed in this January 17, 2024 post following the January 9, 2024 release of certain unaudited preliminary Q4 and FY2023 financial results. In addition, it presented to the investment community at the 42nd Annual J.P. Morgan Healthcare Conference on January 10, 2024.
Now that ISRG has released its Q4 and FY2023 results and provided its FY2024 outlook, I briefly revisit this existing holding.
Business Overview
ISRG has been developing and supporting robotically assisted minimally invasive care for more than 28 years.
Over 76,000 surgeons have been trained on Da Vinci systems and it boats a 99.9% system uptime.
New rivals are entering the previously monopolistic area of robot-assisted surgery. ISRG, however, continues to develop new products to remain the industry leader.
On the January 23 earnings call, management disclosed that it had submitted to the FDA its 510(k) application for the next-generation multiport platform (da Vinci 5).
NOTE: A 510(k) is a premarket submission made to FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, to a legally marketed device.
The da Vinci 5 will join ISRG's existing robotic surgical system portfolio alongside multiport systems X and XI, and single-port system SP thus offering surgeons and hospitals their choice of highly capable, proven solutions.
Once cleared, ISRG believes da Vinci 5's hundreds of design changes that respond to surgeon and care team inputs will enable it to expand market share.
The da Vinci 5 possesses 4 orders of magnitude greater processing power than the current Generation 4 products. This means 10,000 times the processing power to gather data, improve sensing, and deliver better digital and analytic performance.
A phased launch is planned in the first several quarters after clearance given the sophistication of the technologies involved. This will enable ISRG to mature its supply and manufacturing processes for the new system.
ISRG has been in communication with FDA on da Vinci 5 for the past several quarters and has completed a comprehensive multicenter trial. This trial was completed in May 2023 and the 510(k) was submitted to the FDA in August 2023.
ISRG is currently responding to FDA's questions and the timing of the U.S. launch will depend on the time required to resolve these questions.
In addition to FDA, ISRG has initiated conversations on da Vinci 5 with regulators in Japan and in Korea.
Financials
Q4 and FY2023 Results
ISRG's Q4 and FY2023 results are presented in this Form 8-K; the Form 10-K is not yet available.
Total 2023 da Vinci procedures grew ~22% YoY to over 2,280,000 procedures performed worldwide.
FY2023 pro forma gross profit margin was ~68%.
FY2023 pro forma operating expenses grew ~14%.
The FY2023 pro forma income tax rate was 20.6%.
FY2024 Outlook
ISRG anticipates full year procedure growth of 13% - 16%. Overall procedure guidance assumes that growth moderates from FY2023, given the elevated backlog benefit experienced in 2023.
The low end of the range assumes a modest decline in bariatric procedures along with challenges in China from increasing competition and anticorruption activities impacting capital placements, and therefore, procedure growth. In addition, the assumption is that there is no impact from patient backlog in the year.
At the high end of the range, ISRG assumes bariatric surgeries continue at current growth rates, and factors in China do not have a significant impact on ISRG's business. In addition, the assumption is that any backlog of patients would decline throughout the year.
Expectations are that procedure seasonality will follow normalized historical patterns. This results in a tough comparison for the first half of 2024, given the strong procedure growth in the first half of FY2023.
Pro forma gross profit margin in FY2024 is expected to be 67% - 68% of net revenue. The lower estimate reflects the impact of growth in ISRG's newer products and the impact of capital investments to support business growth.
In 2024, ISRG expects pro forma operating expense growth of 11% - 15%. The growth reflects increased depreciation expense as ISRG brings on new facilities and investments to drive its growth objectives.
Noncash stock compensation expense of ~$0.68B - ~$0.71B is projected for FY2024.
Other income, which is comprised mostly of interest income, is expected to total ~$0.29B - ~$0.32B.
Capital expenditures of ~$1B - ~$1.2B, will be primarily for planned facility construction activities.
It is estimated that the FY2024 pro forma tax rate will be ~22% - ~24%.
Credit Ratings
No rating agency rates ISRG because it has no debt.
Dividend and Dividend Yield
ISRG does not distribute a dividend.
The weighted average number of diluted shares outstanding in FY2013 - FY2023 (in millions) is 339, 341, 354, 349, 356, 358, 361, 366, 362, and 357.4. In the quarter ending December 31, 2023, this rose to 358.2. The increase in the number of shares outstanding is attributed to the issuance of shares to employees as part of their compensation.
ISRG periodically repurchases shares to partially offset the number of shares issued to employees.
In FY2023, it repurchased $0.416B or ~1.7 million shares at an average price of $241/share.
There is currently a remaining authorization to repurchase $1.1B of shares.
Valuation
FY2011 - FY2022 PE ratios are 40.02, 30.69, 22.97, 46.20, 37.72, 34.17, 47.07, 72.02, 53.69, 93.18, 77.44, and 70.38.
Refer to my October 19, 2022 post in which I provided ISRG's valuation at the time I wrote previous posts. The following valuation levels at the time of my more recent ISRG posts are provided below for ease of comparison.
When I wrote my April 19, 2023 post, shares were trading at ~$298.60 and the forward-adjusted diluted PE levels were:
- FY2023 - 23 brokers - ~55 based on a mean of $5.42 and low/high of $5.03 - $5.60.
- FY2024 - 23 brokers - ~47 based on a mean of $6.37 and low/high of $5.93 - $6.88.
- FY2025 - 16 brokers - ~40 based on a mean of $7.43 and low/high of $6.87 - $8.29.
When I wrote my July 22 post, ISRG's share price had closed at $335.83 on July 21. ISRG had generated $2.18 and $2.65 in diluted EPS and adjusted diluted EPS in the first half of FY2023 and I envisioned ~$4.50 and ~$5.45 in diluted EPS and adjusted diluted EPS. Using my FY2023 earnings estimates, the forward diluted PE and forward adjusted diluted PE were ~74.6 and ~61.6.
The forward-adjusted diluted PE levels using broker estimates were:
- FY2023 - 26 brokers - ~60.7 based on a mean of $5.53 and low/high of $4.70 - $5.76.
- FY2024 - 27 brokers - ~52 based on a mean of $6.46 and low/high of $5.56 - $7.08.
- FY2025 - 19 brokers - ~45 based on a mean of $7.47 and low/high of $6.56 - $8.60.
When I last reviewed ISRG, the share price had closed at ~$267 on October 20. I envisioned FY2023 diluted EPS and adjusted diluted EPS of ~$4.50 and ~$5.45. Using my FY2023 earnings estimates, the forward diluted PE and forward adjusted diluted PE were ~59.3 and ~49.
The forward-adjusted diluted PE levels using broker estimates were:
- FY2023 - 26 brokers - ~47.8 based on a mean of $5.59 and low/high of $5.50 - $5.82.
- FY2024 - 26 brokers - ~41.4 based on a mean of $6.45 and low/high of $6.15 - $6.76.
- FY2025 - 20 brokers - ~35.7 based on a mean of $7.48 and low/high of $7.07 - $8.03.
At the time of my January 17 post, ISRG's share price was ~$359 and the forward-adjusted diluted PE levels using current broker estimates were:
- FY2023 - 26 brokers - ~64 based on a mean of $5.60 and low/high of $5.51 - $5.68.
- FY2024 - 26 brokers - ~55.8 based on a mean of $6.43 and low/high of $6.01 - $6.65.
- FY2025 - 22 brokers - ~48 based on a mean of $7.47 and low/high of $7.07 - $8.03.
In that prior post, I used the same ~$359 share price and arbitrarily inflated the estimated forward-adjusted diluted EPS. Even then, ISRG's valuation was too rich for my liking.
- FY2023 - ~53 based on $6.80.
- FY2024 - ~46 based on $7.80.
- FY2025 - ~41 based on $8.80.
We now know that FY2023 diluted GAAP EPS amounted to $5.03 and adjusted diluted EPS was $5.71. With the share price now at ~$370, the diluted PE is ~73.6 and the adjusted diluted PE is ~64.8.
Broker estimates are likely to be revised over the coming days For now, however, the forward-adjusted diluted PE estimates using the current ~$370 share price are:
- FY2024 - 26 brokers - ~59 based on a mean of $6.29 and low/high of $5.96 - $6.76.
- FY2025 - 21 brokers - ~50 based on a mean of $7.36 and low/high of $6.76 - $8.34.
- FY2026 - 14 brokers - ~43 based on a mean of $8.63 and low/high of $7.84 - $10.12.
Final Thoughts
My thoughts on ISRG are unchanged from those presented in my January 17 post.
This is an impressive company with excellent growth prospects. However, its valuation is 'off the charts'. In general, companies that are this richly valued are susceptible to a sudden and significant correction if not all goes according to plan. Merely coming up short on earnings consensus can lead to a sharp correction.
In my opinion, ISRG is priced for perfection. I do not, therefore, intend to add to my exposure and will bide my time in the hope that something happens that leads to ISRG being more attractively valued.
I currently hold 450 shares in a 'Core' account in the FFJ Portfolio and it was my 15th largest holding when I completed my 2023 Year End FFJ Portfolio Review. While I do not know if it is still my 15th largest holding, I am confident it is still a top 15 holding without having to complete another FFJ Portfolio Review.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long ISRG.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
