Intuitive Surgical Delivers Strong Quarter; But Analyst Says Sell Now

Intuitive Surgical (ISRG) has delivered another strong quarter driven by better-than-expected system placements and procedure volume. Shares in the robotic surgery company rose 2% in Tuesday’s after-hours trading, with the stock now up 11% year-to-date.

Second quarter Non-GAAP EPS of $1.11 beat Street estimates by $0.62 while revenue of $852.1M beat forecasts by $215.26M, despite falling 22% year-over-year. Also encouraging was the number of the company’s daVinci systems shipped at 178 (down 3.5% year-over-year), versus the Street’s estimated 141. Procedure volume declined by 19% year-over-year, but was nevertheless an improvement on the consensus estimate of 29%.

However, GAAP EPS of $0.57 missed Street expectations by $0.14.

During the first six months of 2020, the company stated that it experienced a significant decline in procedure volume and postponements of system placements, as healthcare systems around the world diverted resources to meet the increasing demands of managing COVID-19.

The impact and timing of the COVID-19 pandemic on the ISRG differed by geography, ISRG said. In the U.S., for example, while da Vinci procedures recovered a significant portion of the pre-COVID-19 levels, the resurgence of COVID-19 in some states has, and will likely continue to, adversely impact procedure volumes.

“Due to the continued uncertainty around the scope and duration of the pandemic and the timing of global recovery and economic normalization, we cannot, at this time, reliably estimate the future impact on our operations and financial results” Intuitive Surgical told investors.

At the same time, ISRG also announced an “Extended Use Program” set to launch in the fourth quarter, which will introduce select Xi/X instruments with 12 – 18 uses compared to 10 today. Prices of certain instruments used in lower acuity procedures will be reduced, said the company, lowering revenue per procedure and customer cost.

Overall Intuitive Surgical shows a cautiously optimistic Moderate Buy consensus from the Street, with 6 recent buy ratings, 4 holds and 1 sell. However the average analyst price target of $579 indicates 12% downside potential from current levels. (See ISRG stock analysis on TipRanks).

Speaking for the bears, Oppenheimer’s Suraj Kalia recommended investors sell the stock. His price target of $365 indicates significant downside potential from here (45%).

According to the analyst, company commentary suggests ongoing uncertainty in capital sales and procedure volume outlook. “Announcement of a new instrument pricing mechanism from 4Q20 caught everyone by surprise, and will effectively dampen top-line growth” he added.

“In the current environment of complete disconnect between valuation and fundamentals, we are losing the battle to ascribe irrational multiples. But, a closer look at fundamentals tells you that the hyper-growth days are behind us. Given IRSG trading at 15x fwd. P/S and 62x fwd. P/E, we believe caution is warranted” Kalia concluded.

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