NEW YORK (TheStreet) -- Shares of Intuitive Surgical (ISRG) , a company that specializes in robot-assisted surgeries, have been on fire since the stock bottomed out at $376 on July 17. In a little over a month, investors have seen their wealth grow by roughly 27%.
The stock, at around $479, is up nearly 25% on the year to date, 3% less than the gains seen since July. This has raised questions as to whether these gains can hold. I don't see a scenario where that's possible -- at least not in the near term.
Trading at a price-to-earnings ratio of 35, these shares aren't cheap.
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Intuitive enjoys a P/E that is 11 points higher than the industry average of 24, according to Yahoo! Finance. This makes no sense when investors can buy Covidien (COV) and St. Jude Medical (STJ) at much cheaper valuations. Both St. Jude and Covidien trade at P/Es that are 10 points less. Not to mention they both pay a respectable yield of more than 1.5%, compared to no dividend for Intuitive.
In the case of Intuitive, bulls insist they're paying for growth. With a P/E of 35 that's exactly what one should expect. But that's not what's happening. The company just posted a 12% year-over-year revenue decline.
This means investors are willing to pay eight times sales for a company that's also suffering from gross margin compression. That's a risky proposition. Gross margin just fell roughly three points year over year, missing Wall Street's estimates by almost one full point. With operating income declining 35% year over year, investors should ask, where's the value?
A company representative was not available for comment.
Although Intuitive's strong position in robotic surgeries has major growth opportunities, including areas like Japan and other markets, the company's current performance doesn't yet jibe with the stock price. I worry that investors are bidding up these shares before the market realizes its mistake.
Intuitive's da Vinci robot, which is regarded the best in the industry, is not alone anymore. Johnson & Johnson (JNJ) is now getting in the action and is working on its own surgical robot, ones that are smaller than da Vinci and more mobile.
I'm not suggesting Johnson & Johnson will immediately knock off Intuitive. But that doesn't matter. What I think is important to consider here is the extent to which Johnson & Johnson can enter the market and steal any share at all. It doesn't have to be the leader.
Any competition all will only impede Intuitive's growth, even in Japan where management has begun to make significant investments. If Johnson & Johnson's robots can prove worthy, this opens doors for other medical device makers to consider their own robotic efforts. Boston Scientific (BSX) and St. Jude shouldn't be far behind.
Until then, Intuitive's management has tons of pressure to grow the business into its valuation. Plus, with the da Vinci robot accounting for close to 50% of Intuitive's revenue, it's not a good feeling when that market is threatened.
To investors insisting that "valuation doesn't matter" -- let's get real. You must also reconcile the 27% jump in value one just month. Intuitive has done little to deserve that love. It's only a matter of time before Wall Street wakes up to its mistake.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates INTUITIVE SURGICAL INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate INTUITIVE SURGICAL INC (ISRG) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, expanding profit margins, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: ISRG Ratings Report