Is Intuitive Surgical a Buy After This 40% Drop?

Intuitive Surgical just reported their Q2 2026 earnings that on a standalone basis look like a really good quarter for a really great business. But the stock does not look like that's the story. Here's a look at the stock chart over the last five years. You can see the price of Intuitive Surgical down to three hundred and forty-five dollars at the time of this recording, off well over forty percent from its early twenty twenty-five and twenty twenty-six highs, touching nearly six hundred dollars. And I just wanna call out, we're going to be using a number of charts from our friends over at fiscal.ai. Of course, they don't just have charts like this, like a stock chart, they have some great tools to help you analyze businesses, see where their revenue's coming from, see where there's risk, like this one right here. Intuitive Surgical's revenue breakdown. We're gonna take a look at this here in just a moment, but seeing that recurring revenue versus the systems revenue versus the services revenue, super helpful in understanding what's going on at Intuitive Surgical. Make sure you check out fiscal.ai/csi. That link gets you 15% off any paid plan. Check it out, fiscal.ai/csi. You can see that the CAGR over the last five years for the stock is actually pretty bad, only about 1.7% annualized growth. And over that same period of time, all the other metrics for Intuitive Surgical has gone up. I'm talking about procedures, their installed base, revenue, earnings, cash pile. Everything has gone up, but the stock is back down to this level. So one of the things that we've mentioned here about Intuitive Surgical is that it is always traded at a premium. But it seems that the market is repricing what it's willing to pay for Intuitive Surgical. So the question we wanna answer is why, and whether that repricing has gone far enough to make Intuitive a buy-the-dip candidate. Let's take a look at the numbers for this most recent quarter. Da Vinci procedure growth up 15% year-over-year, which is right near the top of management's maintained full-year 2026 guidance. The installed base of Da Vinci systems up 12%, nearly 12,000 systems worldwide now. There were 468 Da Vinci systems placed in the quarter. And by the numbers, revenue nearly $3 billion at $2.9 billion, up 19% year-over-year. And their non-GAAP gross margin up a bit as well from the previous quarter to 70%. So they're finally catching up with some of those manufacturing and scalability things like getting the Da Vinci 5 out as well. Here's the geography of these da Vinci systems. The vast majority, of course, 6.6 thousand in the United States. Europe, a growing market, 2.3 thousand. Asia as well, starting to expand at just over 2,000 there. Rest of world, 659. We've talked about this. Intuitive Surgical continues to talk about their ability to expand in some of these other geographies, which they are very obviously doing. Let's go back to this chart from fiscal.ai on Intuitive Surgical's revenue breakdown. In blue, you have instruments and accessories revenue, in orange systems revenue, and in purple services revenue. This is one of the things that we really like about Intuitive Surgical. They have a recurring revenue stream here with their instruments and accessories. In fact, three-quarters of the business revenue is recurring surgical instruments, and that shows up whether or not a hospital system decides to buy a new da Vinci system or Ion system or not in any given quarter. Every surgery that needs to be completed has instruments associated with that procedure, which we're gonna touch on a little bit later here in just a few moments. But up until this point, these surgical instruments are either a one-time use or a very limited time use if they're reprocessed. And their systems being the most volatile revenue line item because not every quarter is going to be the same. They're not gonna be placing the same amount of systems every single quarter. But it's also the fastest grower as far as revenue goes, twenty-four percent CAGR over the last few years. And this makes sense, especially since the average selling price for a new da Vinci system, the fifth generation units, are still in the early innings of release. But now they're over 1.6 million per device. Intuitive Surgical has had a fantastic balance sheet for quite some time, 8.6 billion in cash and equivalents, no debt. So whatever the storm that the market thinks is coming for the US healthcare sector, Intuitive definitely has a nice cash cushion for some negative scenarios. And maybe you're wondering why I mention that right now, maybe, a storm coming for the US healthcare sector. We're gonna touch on that later. We had a great CSI Live where we recently talked about healthcare and investing in healthcare and why it's so hard. One of the reasons is the US healthcare system is quite the mess, and we're gonna touch on this here later in this episode in just a moment. Now let's segue into some expectations for Intuitive Surgical. This is another fiscal chart, and one of the nice things is they have the expectations from Wall Street embedded in their charting system here. So you can see this most recent quarter on the left, and then the expectations over the next calendar year. And so on a trailing 12-month basis for full year 2026, that would bring the earnings per share to about $10, and perhaps up to $12 earnings per share for full year 2027. That's gonna come in handy when we talk about the reverse DCF at the end of this video and maybe what the market is pricing in to the stock price currently. But before we get to that, I just want to show you a few charts that Intuitive Surgical supplied showing their growth of systems and their utilization rates because this is very important to the story. So here's three of their flagship products, the da Vinci MultiPort, the da Vinci 5 is the newest of these. Procedure growth up, install base growth up, and the utilization rates are climbing as well. The da Vinci single port, you can see massive amount of growth in their procedures there, 87% year over year. Installed base is up 39% year over year, and the utilization up nearly 30% as well. And one that I am really excited about is the Ion. This one is for lung biopsies and lung examination. Procedures up 51%, installed base up 24%, and growing utilization for that as well. Cool tech, saves lives, and now the numbers are finally getting big enough to move the needle for Intuitive Surgical. Here's a look at the system placements and installed base on a geographical basis on the right, and on the left we have greenfield or new system placements versus trade-in. You can see that trade-ins are starting to make a good portion of the system placements. That's because of that new da Vinci 5. Hospital systems are trading in older equipment, upgrading to this newest system. In the installed base on the right there, United States, as we showed you earlier, the biggest portion of the pie. But some of these other markets are definitely starting to pick up some steam. And this leads us to the answering of our question, why did the stock take such a beating, and is this a buy the dip candidate? Now, there's a few things that management called out and definitely analysts were concerned about in the call. One of them is the impact from the Affordable Care Act or ACA subsidy expirations. ACA up until this point had a number of subsidies helping folks afford some of that affordable healthcare, and those are running out. And so what that means is folks are actually opting not to renew those insurance premiums. It's getting too expensive, and so they think, you know what, I'm actually going to take the tax hit, and I'm just gonna go without insurance, which leads to an issue with, quote unquote, elective procedures. Elective procedures meaning something that you could possibly put off. Most surgeries are not elective. There's very few that actually fit into that category, but at least some patients are deciding to put some of those off because of their lack of health insurance. Management talked about this on the earnings call. This quote from Jamie Samath, who is the CFO at Intuitive, he said that, "Based on customer feedback, we believe there's a modest adverse impact to Q2 US da Vinci procedure growth from those patients impacted by the expiration of subsidies for ACA or Affordable Care Act enhanced premiums." Basically, long story short, the affordable in the Affordable Care Act is getting much less affordable, and Americans are making a really tough decision. And so how exposed is Intuitive Surgical really to this market? This is another comment made by CEO David Rosa. He said that they don't have a precise estimate, but a significant portion of the business is private pay or commercial insurance. Medicare is a lower portion, and Medicaid is lower yet again. So they don't have an exact estimate, or they weren't willing to share an exact estimate of what portion is affected by the business based on those ACA subsidies expiring. But that is definitely something the market wants to know, whether or not they're gonna be affected by something like this. And the reason investors could be and probably should be worried about this is if ACA falls off, if Medicaid patients become a bigger portion of the pie, hospitals have to eat more bad debt. And when hospitals have more debt, they are probably not in the market for nearly two million dollar machines. But again, management stressed that they feel like the US capital environment has been stable. There's been healthy system placements in the US, up to 24%. They feel like there is plenty of flexibility in capital budget constraints, and so they feel like this is not something to be too concerned about at this time. I also wanna give a shout-out to the semiconductor memory market, because that was specifically mentioned on the call. The management said that is a factor, higher costs for freight and semiconductor memory. So even companies like Intuitive Surgical are feeling the squeeze from the semiconductor industry. But a couple of positive catalysts that we wanna call out here, the extended use program that management mentioned. They're gonna increase a number of uses on a subset of the EndoWrist instruments to lower customer cost per procedure. So their thinking is lower cost equals broader adoption equals higher utilization, which means they can innovate more at Intuitive Surgical. So small give and take here. Maybe allow their customers to use these instruments for a little bit longer than they have previously, allow them to reprocess them, and in turn, the hospital saves money and can spend more money later on. Another interesting thing that management mentioned is that they submitted to the FDA a 510 clearance for a flexible robotic endoscope for the GI tract or gastrointestinal tract. We don't know if that's going to go through or what the timeframe is on that there, but something to keep in mind for the future. Let's move on to the guidance for full year 2026. Management just reiterated what they said earlier this year. They said 13.5 to 15.5% procedure growth. Expectation is they're gonna land near the midpoint of that. This range already bakes in this ACA patient behavior headwind, China pricing pressure, European healthcare capital pressure, Japan GLP-1 obesity, lowering bariatric procedures. All of those things are baked into that guidance again. The last time we covered Intuitive Surgical over on Chip Stock Investor, at the time, the stock price was much higher, and it required about a 22% per share growth rate for a decade to justify the price it was at that time, which is obviously quite the high bar to clear. So the stock price has come down now. Let's look at a couple of scenarios that could be baked into the stock price right now. Okay, so here is the first one. This one is over a shorter time horizon, only five years. Terminal growth rate of 6%, and that would require a 17% earnings per share growth rate for the next five years. Before we get too far into the weeds here, let's show you the second one, which is a 10-year time horizon. Terminal growth rate of 4%, lower than that 6%, gets us to a growth rate of 15% per year over the next 10 years to justify the stock price at around $347 per share. So keeping those two in mind, there's a few scenarios that we think either one or a combination of all three could be why the market got to the current valuation that the stock is at right now. The first one, slower growth because investors fear a healthcare bubble and growing cracks in the US healthcare foundation. This could be what's happening with that shorter time horizon. Investors maybe are willing to go with that first reverse DCF time horizon of five years, but they can't see clearly enough past the possibility of the real issues that we talked about, including the ACA enrollees dropping, maybe Medicaid tightening, maybe hospital bad debt, elective surgeries getting deferred. So they shorten that growth window instead of extending it. So in this scenario, maybe you believe that the stock is fairly valued if you think that the growth story can hold on for about five years before there is some US health system strains and maybe has a crisis, if at all. The second scenario may be a slower growing but longer duration. That's the 10-year time horizon. The market could be saying that Intuitive Surgical keeps compounding for a decade, but at 15% rather than a higher growth rate, and it eventually matures to a 4% terminal, which is below the historical premium for Intuitive. The issues that could play out here is a growing competition. Although Intuitive Surgical, as we have mentioned is way ahead of any of its other competitors. But over the years, that gap could narrow. GLP-1s could continue to erode the bariatric surgical procedures. And ultimately, as Intuitive installs more devices, more systems in hospital systems, maybe the growth rate just starts to mature and level out as well. And then finally, let's go to scenario three, which is actually the simplest of all explanations on why Intuitive has taken such a hit. There's a $1 trillion market rotation, as in investor money is just not generally interested in healthcare right now. Maybe something with all of the manufacturing that has been announced over the coming year and a half through 2027, all of the US reshoring and manufacturing and AI infrastructure, healthcare is just broadly out of favor. Investors are paying less for the same earnings. So it could be one of those scenarios, it could be all three of those scenario. Most of the time, as you know here at CSI, we preach radical moderation, so we think that it's somewhere in the middle of all of these three scenarios. Intuitive has always been a premium stock. Now it's down significantly. So is the stock a buy? Of course, we'll leave that up to you. But this is the first time in a good long while that some of the reverse DCF scenarios are asking for a growth rate that is below what the business is actually delivering. They have a great balance sheet, platform optionality, growth innovation. So it's possible that at this price we might take a nibble. We haven't made any firm decisions yet, but we need to assess whether or not we're in need of more large cap value positioning in our portfolio personally. Make sure you check out fiscal.ai/csi where you can make great charts like you saw in this video, and make sure you hit the subscribe button. Check out chipstockinvestor.com and if you wanna know more about that tech rotation, the $1 trillion tech rotation, check out this video that we did just last week on that right here on hyperscaler capital expenditures. Watch it now.