Intuitive Surgical (ISRG) shares are up more than 13% early in Wednesday trading. Investors are reacting to the excellent Q1 2023 earnings report released after yesterday’s close.
The manufacturer of robotic surgical systems beat the analyst estimates for both sales and earnings. On the top line, its revenue was $1.70 billion during the quarter, $100 million higher than the IBES Refinitiv estimate. On the bottom line, it earned $1.23 a share, three cents higher than the consensus.
Over the past three years, due to Covid-19, surgical procedures have slowed considerably, putting a governor of sorts on its revenue growth. If surgeons aren't performing procedures, they don't need robotic surgical systems like Intuitive’s da Vinci.
This is excellent news for shareholders because the quarterly report suggests the company's historical growth is set to return. As a result, its share price could hit $400 sooner rather than later.
Here's why.
More Procedures = More Systems = More Profits
In the first quarter, surgical procedures worldwide increased by 26% over Q1 2022. Interestingly, the compound annual growth rate between Q1 2019 and Q1 2023 is 18%, which suggests growth in the first quarter was higher than what's been typical since the beginning of the pandemic.
It’s easy to understand why its share volume is exceptionally high on Wednesday.
According to Barchart.com data, ISRG’s price volume is the ninth highest of all stocks on U.S. exchanges. As for its volume, it’s 2.87 million at this moment, almost double its 30-day average volume. By the end of today, it will likely be double or triple the 30-day average.
In the first quarter, Intuitive placed 312 da Vinci surgical systems, one more than a year earlier. It finished March with 7,779 systems installed worldwide, 12% higher than 6,920 a year ago.
Considering these numbers, you might conclude that adding only one more surgical system in the quarter, compared to what was added in the year-ago quarter, suggests growth hasn’t reignited despite the 26% increase in procedures.
However, you might want to consider the long-tail nature of Intuitive’s robotic systems. Costing between $1 million and $3 million, depending on the model, these aren’t purchases that happen overnight. It takes time for hospitals and surgeons to get approval to make such an investment.
As procedures return to pre-pandemic levels, the company will likely experience an uptick in the number of systems added each quarter relative to what was added a year ago. I.e., if it added 300 systems in Q2 2022, there’s a good chance it will add more than 301 systems in Q2 2023.
Of course, we won’t know how much until late July when it reports its second-quarter results.
In the Meantime
Intuitive finished the first quarter with $6.58 billion in cash, cash equivalents, and investments. While that was down $163 million from the end of December, it still has an unbelievably sound balance sheet with lots of cash and no debt.
“Our core business was lifted by positive surgical trends and continued interest in robotic-assisted surgery when compared with other surgical approaches,” said Gary Guthart, Intuitive CEO. “We continue our focus on increased adoption, pursuit of expanded indications and product launches, excellence in supply and product quality, and increased productivity as we scale our business.”
Now, it’s important to note that Intuitive’s business isn’t just the one-time sale of da Vinci systems. In fact, system sales only accounted for 25% of its $1.70 billion in revenue in the first quarter. The rest was recurring revenue for instruments, accessories, and services.
For example, its recurring revenue in Q1 2023 was $1.38 billion, 21% higher than Q1 2022 and 6% higher than Q4 2022. The last quarter it had 21% recurring revenue growth year-over-year was Q3 2021 when they were up 24%. That was 18 months ago.
Looking at its systems’ revenue growth, you’ll see that some of its most significant quarterly increases were in 2021. Not coincidentally, its recurring revenue growth was also significant.
I would not be surprised if 2021 happened again in 2023. The numbers point the way. We won’t know if the first quarter results were a fluke or part of a new trend higher. If you own or want to own ISRG stock, you’re hoping it’s the latter.
Another point from its Q1 2023 earnings report jumps out at me.
Of the 312 systems placed this past quarter, 250 were the Xi systems, which are more expensive than the X and SP systems. This means that the average price per system is much higher than the $1 million entry-level systems. As a result, it doesn’t have to sell as many systems as it once did to deliver YOY revenue increases each quarter.
That’s excellent news.
The 25 analysts covering ISRG stock have a median target price of $310, barely above where it currently trades. Investors can expect Wall Street to deliver many target price increases over the next few weeks.
$400 could be just around the corner.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
