Contents
Periodically, great companies temporarily fall out of favor with investors thus providing an investment opportunity. Intuitive Surgical (ISRG) is such a company.
When I wrote my January 25, 2025 Beware Of Intuitive Surgical’s Valuation post, the share price had recently touched $616 before tracing back to $584. Despite the company's attractive long-term outlook, I viewed shares as being far too expensive.
I last reviewed ISRG in this July 24, 2025 post at which time I disclosed acquiring an additional 50 shares @ $499.935.
Fast forward to September 3, and ISRG's closing share price is ~$441.
I now view this as an opportune time to revisit this existing holding.
Wells Fargo Healthcare Conference
On September 3, three members of ISRG's senior management (including David Rosa, the company's new CEO) presented at the Wells Fargo Healthcare Conference. The presentation is currently accessible through a link in the Events and Presentations section of ISRG's website.
NOTE: David Rosa was officially named CEO effective July 1, 2025, succeeding longtime CEO Gary Guthart, who became executive chair. Rosa has been a member of ISRG's Board of Directors since 2024 and has been with ISRG since 1996.
ISRG continues to benefit from the ongoing global adoption of robotic surgery. Even though new competitors are entering the market, ISRG remains the dominant player. With the latest release of the next-generation platform (Da Vinci 5), the company should maintain its dominance.
In my July 24 post, I include pages from ISRG's Q2 earnings presentation which reflect procedure growth of 15% - 17%. In FY2024, procedures performed using ISRG's Da Vinci products was 2.68 million. This may seem significant but the global total addressable market is considerably greater!
The US market remains a key priority and one key area of focus is ensuring ISRG can service customers at scale. This means ensuring manufacturing facilities, the supply chain, and field services (all the pieces of the puzzle) are functioning at peak efficiency. In preparation for future growth, ISRG's cumulative research and development in FY2022 - first half of FY2025 totals ~$3.653B and its cumulative CAPEX during the same period totals ~$1.979B. Note that ISRG has no debt!
Challenges And Opportunities
A significant component of ISRG's annual revenue is generated from within the US. The company's existing strategy will not materially change BUT the plan is to drive growth in international markets.
Many of ISRG's customers continue to face budget constraints. In the US, ~70% of ISRG's equipment is leased so ISRG is somewhat shielded from capital budget sensitivity.
International customers and prospects are not immune from capital budget sensitivity but leasing is only used for ~30% - 40% of ISRG's international placements. International governments with large public healthcare systems, however, are constraining how much is being allocated to their healthcare systems. At the September 3 conference, the UK and Japan were specifically mentioned. ISRG plans to help its customers and prospects overcome these headwinds by encouraging them to make greater use of leasing to procure ISRG platforms.
China remains a challenge with significant pressure on pricing and a significant increase in domestic competition. In addition, the government's efforts to crack down on corruption is significantly slowing the tender process.
The US market also tends to adopt the latest technology more quickly than most other countries. As more procedures are performed using ISRG's equipment and more peer-reviewed articles are published, the international adoption of ISRG's robotic platforms is expected to increase.
ISRG also works extremely closely with its customers to identify opportunities to expand the types of procedures that are performed with its various platforms. This should lead to an expansion in the total addressable market.
An issue ISRG faces is the threat of other manufacturers creating instruments at lower price points that can be used with ISRG's robotic programs. ISRG is well aware of this threat but is focusing on educating its customers about the value ISRG brings to the equation; price is just one piece of the puzzle. Efficiency, safety, and supply continuity are also key components customers must factor into their purchasing decisions.
ISRG also brings additional value through innovation. The company is currently investing in programs that will add more capabilities to the base instrument platforms.
Valuation
When I wrote my July 24 post, ISRG's shares were trading at ~$499.935. Shares were definitely not a bargain but I added a few shares to my exposure. With shares currently at ~$441 and no material change to the company's long-term outlook, I think ISRG presents an attractive long-term investment opportunity.
On September 3, I acquired 194 shares @ $447.26 in 2 different 'Core' accounts within the FFJ Portfolio.
As noted in my prior post, ISRG generated YTD2025 diluted EPS of $3.72 and $4.00 of adjusted diluted EPS. Despite the headwinds management presented on the Q2 2025 earnings call, there is a good probability that FY2025 diluted EPS and adjusted diluted EPS could be ~$7.45 and ~$8.00. The diluted PE and adjusted diluted PE using my September 3 purchase price are ~60 and ~56.
Using this purchase price and the current broker estimates, ISRG's forward-adjusted diluted PE levels are:
- FY2025 - 28 brokers - ~54.8 based on a mean of $8.16 and low/high of $7.95 - $8.31.
- FY2026 - 27 brokers - ~48.2 based on a mean of $9.27 and low/high of $8.73 - $9.77.
- FY2027 - 20 brokers - ~41.5 based on a mean of $10.79 and low/high of $10.10 - $11.81.
- FY2028 - 7 brokers - ~36.6 based on a mean of $12.21 and low/high of $11.31 - $13.92.
Although I look at brokers' earnings estimates, I am extremely reluctant to place any reliance on them. My reasoning for excluding estimates beyond the current fiscal year is that I have no idea how anybody, especially in the current environment, can determine how a company will perform over the next few years. The variance in the brokers' earnings estimates clearly indicates there is no consensus on how ISRG is likely to perform going forward.
Looking at ISRG's valuation from a P/FCF perspective, there is a considerable variance in FCF when we use the conventional and modified methods (see table provided in my July 24 post). This is because ISRG issues significant shareholder based compensation.
If we assume that ISRG can generate a similar amount of FCF/share in the second half of FY2025 as in the first half, we arrive at ~$5.626 and ~$3.53 of FCF/share. Both are well below my estimates of ~$7.45 in diluted EPS and ~$8.00 adjusted diluted EPS. ISRG's valuation from a FCF perspective when using my $447.26 purchase price is ~79.5 and ~126.7.
For ease of comparison, I reflect what I wrote in my prior post regarding my assessment of ISRG's valuation.
On July 23, I acquired another 50 shares @ $499.935.
ISRG has generated YTD2025 diluted EPS of $3.72 and $4.00 of adjusted diluted EPS. Despite the headwinds management presented on the Q2 2025 earnings call, there is a good probability that FY2025 diluted EPS and adjusted diluted EPS could be ~$7.45 and ~$8.00. The diluted PE and adjusted diluted PE using my recent purchase price are ~67.1 and ~62.5.
Using my recent $499.935 purchase price and the current broker estimates, ISRG's forward-adjusted diluted PE levels are:
- FY2025 - 28 brokers - ~61.7 based on a mean of $8.10 and low/high of $7.75 - $8.31.
- FY2026 - 28 brokers - ~54.2 based on a mean of $9.23 and low/high of $8.70 - $9.80.
- FY2027 - 20 brokers - ~46.5 based on a mean of $10.75 and low/high of $10.00 - $11.87.
- FY2028 - 7 brokers - ~41.1 based on a mean of $12.16 and low/high of $11.31 - $13.96.
Although I look at brokers' earnings estimates, I am extremely reluctant to place any reliance on them. My reasoning for excluding estimates beyond the current fiscal year is that I have no idea how anybody, especially in the current environment, can determine how a company will perform over the next few years. The variance in the brokers' earnings estimates clearly indicates there is no consensus on how ISRG is likely to perform going forward.
Looking at ISRG's valuation from a P/FCF perspective, there is a considerable variance in FCF when we use the conventional and modified methods (see table above). This is because ISRG issues significant SBC.
If we assume that ISRG can generate a similar amount of FCF/share in the second half of FY2025 as in the first half, we arrive at ~$5.626 and ~$3.53 of FCF/share. Both are well below my estimates of ~$7.45 in diluted EPS and ~$8.00 adjusted diluted EPS. ISRG's valuation from a FCF perspective is ~88.9 and ~141.6.
Final Thoughts
Warren Buffett and Charlie Munger (Berkshire Hathaway) believe that short-term share price behavior is largely meaningless and can lead investors astray. They consistently advocate ignoring short-term market fluctuations and prioritizing the fundamental value of businesses for long-term investing.
ISRG's valuation was unreasonable earlier this year. Now, its valuation is somewhat more reasonable.
Investors inclined to invest in companies with low PE levels will 'pass' on ISRG. ISRG, however, is very different from the typical 'value' companies that just 'plod along'.
ISRG's annual revenue in FY2015 was $2.38B. In FY2022 - FY2024 it was $6.2B, $7.1B, and $8.4B and I forecast FY2025 revenue of ~$9.5B (growth of 14.5%, 18%, and 13%). If the top line growth slows to ~8% annually, ISRG could generate ~$20.5B in annual revenue in 2035.
NOTE: Apply the rule of 72 with 8% annual growth and revenue should double in 9 years.
ISRG's R&D and CAPEX investments is recent years is in the billions. Furthermore, it repurchased $3.023B of its shares in FY2022 and FY2023; 365.8 million weighted average diluted shares in FY2021 dropped to 357.4 million in FY2023.
Despite these significant cash outlays, ISRG still has over $10B of cash, cash equivalents, and short-term investments on its balance sheet at the end of Q2 2025!
In the first half of FY2025, ISRG has repurchased only $0.181B of its shares. I now suspect the company may ramp up its share repurchases.
ISRG was my 7th largest holding when I completed my 2025 Mid-Year Portfolio Review. Unless I complete a similar review again, I do not know its current ranking.
When I completed my July 24 post, my ISRG exposure was 650 shares. Following my September 3 purchases I now hold 844 shares.
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.
