Intuitive Surgical Stock Seems To Be A Better Bet On This Medical Technology Company
We think that Intuitive surgical stock (NASDAQ: ISRG) is currently a better choice compared to Edwards Life Sciences (NYSE: EW), a medical technology company specializing in artificial heart valves and hemodynamic monitoring, although Intuitive Surgical is the more expensive of the two. The ISRG is trading at around 22x sliding revenue, compared to just 14x for Edwards Lifesciences. Although both companies have benefited from the increase in the total volume of interventions after the pandemic, the financial performance of Intuitive Surgical has been better in recent years. However, there is more to the comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Intuitive Surgical vs Edwards Lifesciences: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.
1. Intuitive surgical revenue growth has been stronger
Today, Intuitive Surgical’s revenue growth over the past twelve months has been better than that of Edwards Lifesciences (27% vs. 17%), given a sharp rebound in total procedural volume, resulting in more investments of the da Vinci system. Even if we were to consider a longer duration, Intuitive Surgical’s last three years CAGR of 11.6% is higher than that of 8.5% for Edwards Lifesciences.
Going forward, Intuitive Surgical is expected to experience strong revenue growth with increasing demand for robotic surgical systems. For Edwards Lifesciences
2. Intuitive surgery is more cost effective
Similar to the trend in revenue growth, Intuitive Surgical’s past three-year average operating margin of 29% is above 22% for Edwards Lifesciences. Both companies have seen their operating margins rebound in recent quarters, and the last twelve months operating margin is above 32% for both companies. This compares to the figure of 31% for Intuitive Surgical and the figure of 26% for Edwards Lifesciences in 2019, before the pandemic. Overall, Intuitive Surgical’s margins were better than Edwards Lifesciences. That said, both companies’ margins are expected to be negatively affected in the near term due to inflationary pressures and supply chain headwinds, but increase in the long term.
The net of everything
Now that nearly 60% of the US population is fully vaccinated against Covid-19, with global economic activity growing strongly, demand for medical devices is expected to increase in the future, bodes well for both companies. As the Covid-19 crisis draws to a close, demand for the sale of medical devices will also normalize once the backlog of procedures is cleared. However, for Intuitive Surgical, its growth prospects depend on new locations for its da Vinci systems and this is expected to remain strong over the next few years, given limited competition and increased volume of procedures.
Covid-19 proves more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in the United States are higher than they were a few ago months, despite their fall in October. This can have a direct impact on the volume of interventions in certain geographical areas in the short term. That said, both companies have seen a strong rebound in demand since the pandemic. While the current valuation of Edwards Lifesciences is surely more attractive than that of Intuitive Surgical, with EW stocks trading at around 14x trailing earnings, versus 22x for Intuitive Surgical, the latter has demonstrated better revenue growth and improved profitability in recent years.
Not only that, even if we were looking at financial risk, Intuitive Surgical doesn’t have any significant debt, while its 63% cash as a percentage of assets is also better than Edwards Lifesciences’ 22%. Overall, Intuitive Surgical trumps Edwards Lifesciences in most important metrics for investors and we believe this valuation gap between Intuitive Surgical and Edwards Lifesciences is broadly justified. In fact, going forward it is likely that the valuation spread of these two companies will persist for the foreseeable future and Intuitive Surgical could continue to outperform with its better growth prospects and lower risk.
While the ISRG stock may see higher levels, 2020 has created many price discontinuities which may provide some interesting trading opportunities. For example, you’ll be surprised at how counterintuitive stock valuation is to Abbott vs. Corcept.
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Returns Nov’21 MTD  YTD  2017-21 
ISRG yield -6% 21% 367%
EW Efficiency -6% 20% 251%
Return S&P 500 1% 22% 105%
Trefis MS Portfolio Return -3% 46% 297%
 Monthly cumulative and annual cumulative at 11/29/2021
 Total cumulative returns since 2017
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