One of famed investor Warren Buffett’s investment principles is to buy shares of wonderful companies at fair prices and hold them for the long term. Let’s use this value investing principle to evaluate Intuitive Surgical (NASDAQ: ISRG), a specialist in surgical robots, analyzing whether its current stock price is reasonable and if it represents a good buy today.
Firstly, this healthcare giant is undoubtedly a wonderful company. Intuitive Surgical is helping revolutionize medicine through innovations in robotic surgery. The company’s da Vinci system, among the first robotic-assisted surgery (RAS) devices cleared in the U.S., is the runaway market leader. The company generates consistent revenue, profits, and cash flow. It also benefits from an economic moat thanks to intangible assets (patents that grant it pricing power) and high switching costs—its devices are expensive to purchase and train staff on, making a switch to a competitor highly unlikely. Strong cash generation and a durable moat are key traits Buffett highly values.
However, bears might point to several potential risks:
Intuitive Surgical is facing multiple headwinds. First, tariffs are already negatively impacting its financial performance. Even if President Donald Trump’s aggressive trade policies change after his term, they currently pose a threat to the company’s outlook.
Second, competition is set to intensify in the coming years. Medtronic is close to launching its Hugo RAS system in the U.S., which will compete directly with the da Vinci in urologic procedures. Johnson & Johnson is testing its Ottava system in gastric bypass surgery, another indication where the da Vinci is already cleared.
Third, despite the stock’s underperformance this year, some traditional valuation metrics suggest it still appears expensive:
At these valuation levels, and given the current and potential future challenges, can Intuitive Surgical still deliver superior returns to investors who buy today?
It’s worth noting that Intuitive Surgical’s valuation seems more reasonable when considering its Price/Earnings-to-Growth (PEG) ratio of approximately 2.2. While this is still above the S&P 500’s average of around 1.5, a company performing as well as Intuitive Surgical arguably deserves a premium.
Despite the tariff threat, the company continues to post robust financial results. Second-quarter revenue grew 21% year-over-year to $2.44 billion. Non-GAAP (adjusted) earnings per share came in at $2.19, up 23% from the year-ago period. Trailing-12-month free cash flow soared 240% to nearly $2 billion. Even with an expected 1% headwind from tariffs on its top line, Intuitive Surgical is still poised to deliver strong full-year results.
As for competition, while the RAS market will become more fierce, the industry is severely underpenetrated, leaving more than enough room for multiple winners. RAS devices enable surgeons to perform minimally invasive procedures that benefit everyone: less cutting, bleeding, and scarring for patients, and shorter hospital stays for both patients and hospital systems.
However, robotic procedures are still far from achieving widespread adoption for all eligible indications, indicating massive long-term growth potential. Intuitive Surgical’s moat—including its first-mover advantage with a long list of approved procedures and a large installed base of over 10,000 da Vinci systems—should allow it to remain the leader, as new competitors will need time to catch up even after entering the market.
The Verdict: Intuitive Surgical’s stock isn’t cheap. But the premium is justified, and the company can likely still deliver above-average returns—so long as investors stay the course for at least five years.
