Intuitive Surgical’s High Valuation: Is the Stock Overvalued?



Peer comparison

As of October 5, 2017, Intuitive Surgical’s (ISRG) forward PE (price-to-earnings) multiple is 120.3x, which is significantly higher than its peers and the industry average. Medtronic (MDT), Stryker (SYK), and Edwards Lifesciences (EW) are trading at forward PE multiples of 16.4x, 20.6x, and 26.7x, respectively. A forward PE multiple is a company’s growth measure and is calculated by dividing the company’s current share price with its earnings estimate for the next 12 months.

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Strong fundamentals

Intuitive Surgical has a strong business model, and its high margin instruments, accessories, and services business provide a recurring stream of revenues. Its da Vinci installed base has been getting more diversified. The above map shows the company’s geographic footprints. The company is also focusing lately on expanding its presence in the European and Asian markets. For more on this, read Intuitive Surgical Plans to Expand in Europe and Asia.

Is ISRG stock overvalued?

Intuitive Surgical has been growing at a fast pace for the last few quarters. The company is currently trading at its all-time high. Some Wall Street analysts believe that the company’s exceedingly high stock price and valuation have the company’s growth potential priced in and that the valuation is riding high on investor sentiments. The fundamental valuation hints that the stock could be overvalued. However, another view of the company’s valuation takes into account the high growth potential of the surgical robotics market and undertapped opportunities. Since Intuitive Surgical is the leader in this market space, it’s expected to have an advantage over other players such as Medtronic and Johnson & Johnson, which are preparing to enter this space.

Investors can take a diversified exposure to Intuitive Surgical and participate in the growth potential of the company by investing in the Vanguard S&P 500 ETF (VOO). VOO has ~0.18% of its total holdings in Intuitive Surgical.


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