Intuitive Surgical: Profit or Peril Ahead Amid Trade & Turf Wars?

Key Points

• Intuitive Surgical has been a standout performer in recent years, but can its run continue in the long term?
• Tariffs and growing competition are two factors that are negatively affecting the company now more than ever.
• Will these threats thwart the success of Intuitive shares going forward, or can they continue to thrive in an under-penetrated market?

 

Over the past several years, one of the most impressive stocks in the healthcare sector has undeniably been Intuitive Surgical NASDAQ: ISRG. The company’s robotics-assisted surgical devices have proven to be extremely innovative, attracting intense demand from doctors around the globe.

In three years, the stock has achieved a return of nearly 167% as of the June 17 close. This massively exceeds the approximately 70% return of the S&P 500 Index over the period. This is a particularly remarkable feat given that healthcare has been the worst-performing sector during this time. The Health Care Select Sector SPDR Fund NYSEARCA: XLV has provided a three-year total return of just 17%.

However, this significant outperformance begs the question: Is Intuitive overvalued? Analysts at Deutsche Bank certainly seem to think so. Their latest price target of $440 implies 14% downside versus the stock’s June 17 closing price. Still, other analysts remain bullish. Citigroup’s latest $650 target implies 27% upside. So, what is to make of Intuitive stock, and can it continue to be a strong long-term investment?

ISRG and Tariffs: Near-Term Headwind, But Manageable in the Long Run

Starting with the negatives around Intuitive, tariffs come to mind. In its latest earnings call, the company said it believes tariffs will negatively impact its gross margins by 1.7% in 2025, plus or minus 30 basis points. The company does not expect to be able to mitigate these effects in 2025. However, it is making longer-term adjustments to reduce its exposure to trade policy fluctuations. Tariffs could also affect demand, as Intuitive will pass much of the price increases down to customers. Trade wars might especially impact the company’s outside-U.S. (OUS) business.

International growth is key to the company’s strategy. About 58% of its 10,189 Da Vinci systems are in the United States. This indicates that the rest of the world is significantly less penetrated. Overall, tariffs represent a near- to mid-term headwind. However, Intuitive can handle this pressure over the long run, assisted by mitigation efforts and the likelihood of trade policy stabilization.

Competition Rising: Medtronic’s Hugo Is on Its Way

Intuitive has dominated minimally invasive robotic-assisted surgeries for years. However, the emergence of greater competition is another issue facing the firm. Around 15 systems have achieved regulatory clearance.

Additionally, in April, the $110 billion healthcare giant Medtronic applied for Food and Drug Administration approval of its Hugo system. Hugo is already in use in 25 countries. It also achieved a very high surgical success rate of 98.5% in its clinical study. These factors suggest that approval is likely. This will bring more competition for Intuitive in the U.S. market, possibly pressuring growth and margins going forward.

However, Intuitive still has many factors on its side. This includes a two-decade head start on much of its competition. This gives the company a significant scale advantage, allowing it to remain very profitable even if competitors undercut its pricing. The firm has also built up years of trust with doctors, making switching to a less battle-tested device a tougher sell.

Low Market Penetration: The Bullish Underpinning for ISRG Shares

Ultimately, Intuitive’s ability to keep performing well depends largely on one factor: market penetration. Low levels of market penetration indicate that growth can continue long-term. This is the case in Intuitive's market, as most surgeries that doctors could perform using robotic assistance are not. At the J.P. Morgan Healthcare Conference in January 2023, Intuitive believed it was “less than one-third penetrated" into its current markets.

This estimate also left out multiple factors. It only included the current da Vinci systems Intuitive had in the market at that time in approved countries for approved uses. Although the company’s sales have grown significantly since then, it has also expanded its international reach and gained approval for new types of surgeries. Thus, the company continues to find new ways to expand its market, allowing it to stay relatively under-penetrated.

The stock trades at a high forward price-to-earnings (P/E) multiple of around 63x. However, that is not unexpected for a company with such a dominant market position and a long runway for growth. The figure is also only moderately higher than its average of 58x over the last five years. All in all, Intuitive Surgical remains a stock that can continue to perform strongly over the long term. Tariffs and increased competition are notable headwinds. However, the company’s competitive position in an under-penetrated market is a recipe for success.