Intuitive Surgical loses 5% despite strong Q4 earnings 🚩Slowing growth pace?

Shares of Intuitive Surgical (ISRG.US) are losing 5% after its Q4 2024 financial results, even though the company beat forecasts on revenue and earnings per share. Part of the reason for the decline was that the company expects 2025 operations to grow 13%-16% y/y, so below the 17% growth rate in 2024. Analysts had expected growth of 17.1% in 2025. The company installed as many as 174 da Vinci 5 robots in the US in Q4, up from 110 in Q3 2024, but pricing strategies in the Chinese market yielded weaker-than-expected results.

Q4 2024 financial results

• Intuitive Surgical achieved adjusted earnings per share of $2.21, beating forecasts of $1.79 by more than 22%
• Revenue was $2.41 billion, beating expectations of $2.25 billion. Year-on-year sales growth was 25%.
• The company installed 493 new surgical systems, including 174 da Vinci 5; about 66% sales result above expectations.
• The number of procedures performed with Intuitive Surgical's systems increased 18%, driving higher sales of disposable surgical instruments and accessories.
• Instrument sales increased 23% to reach $1.41 billion in Q4, which exceeded forecasts of $1.37 billion.
• Intuitive Surgical had about 34% penetration of the robotic surgery market at the end of 2024, which could give it room in the long term to double its target market in the future (22 million surgeries per year)
• Intuitive's current scale is 8 million surgeries per year, not including the additional 700,000 per year associated with the lung biopsy robot, Ion.

Oppenheimer with tentative evaluation of Intuitive

Intuitive Surgical has signed a significant distribution agreement worth 290 million euros, to be finalized by 2026. The agreement will give the company a direct presence in Italy, Spain and Portugal. The company has also received approval for thoracic and colorectal indications for the SP system, which will likely help commercialize the product. Nonetheless, analysts at Oppenheimer pointed to several concerns around valuation and business:

• They estimate that the U.S. market for Intuitive Surgical products appears to be reaching saturation levels. The added value of the new dV5 system, priced as much as 30% above the price of the previous Xi model, remains uncertain.
• On the other hand, Truist Securities, Deutsche Bank, BTIG and Raymond James have raised their target prices for ISRG shares; Bernstein reaffirmed its Outperform rating and set a target price of $700. 
• The company's gross margin was 69.5% and operating margin was 38.4%. Strong margins on sales of the new Da Vinci 5 robots contributed to the impressive quarterly results.
• Analysts predict that the company's financial performance will improve throughout the year. The growth prospects are underpinned by five breakthrough product cycles that Bernstein's analysis says will accelerate the company's growth in the near future. In an optimistic scenario, analysts predict that Intuitive Surgical's EPS could reach $11.50 by 2026. Revenue growth, solid financial health and the expected widespread introduction of the new dV5 system are key factors supporting optimism. 

Intuitive Surgical shares (D1)

The company's shares are retreating nearly 5% today, however, giving back relatively little of the recent euphoric gains. Investors may be noting that the company's valuation has become challenging due to the great health of the business, and any even 'minor stumble' could be costly for new shareholders. The price/earnings ratio is nearly 4 times the average of S&P 500 companies, and currently stands at about 93 times Intuitive Surgical's annual earnings.

Source: xStation5