It's not easy to own a stock that's trading at 39 times its trailing earnings, with little hope of that changing anytime soon. In the case of Intuitive Surgical (Nasdaq:ISRG), the premium may well be worth it. (For related reading, see P/E Ratio.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Value Versus Growth, on Steroids
No, Intuitive Surgical certainly isn't a value stock. Competing surgical device and equipment makers like Medtronic (NYSE:MDT) and Zimmer Holdings (NYSE:ZMH) both boast much lower trailing price-to-earnings measures. The former trades at about 12 times its trailing twelve-month earnings, and the latter at around 16 times its trailing income. The industry as a whole is sitting on a P/E of 16.3.

Time to shed ISRG shares then? Were it most other industries with that kind of disparity, the answer would probably be "yes". When it comes to medical and surgical equipment though, what seems like a ridiculous valuation may be far more supported than most investors could ever imagine.

Healthy Track Record
For proof, look no further than Intuitive Surgical's five-year history. Since early 2007, the stock has gained about 390%, yet its trailing twelve-month P/E has been above 26 almost the whole time and has averaged approximately 36 for that span. The only time it dipped below the 26 mark was in early 2009, reaching 17.5 before moving back above 26.0 by the middle of the year. Yet again, the stock soared despite a valuation that would be unpalatable for most other names.

Lesson learned? "Expensive" is a relative term. More important to today's nervous shareholders though, the rather high P/E measure isn't necessarily a reason to bail out. Indeed, there may even be reason for newcomers to step in. (To learn more, read Beware False Signals From The P/E Ratio.)

How to Justify Frothy Valuations
Most stocks can't sustain valuations of more than 30 times their trailing earnings. There's an important lesson from the ones that can, however - they've proven they can innovate and grow earnings (an obvious but still-rare quality), and they've captured the hearts and minds of investors.

Take Amazon.com (Nasdaq:AMZN), for instance - another stock that has averaged an enormously high P/E reading (of above 90) for the past five years, yet it has gained around 346% during that time. The key to Amazon's unlikely stock success was a great underlying story that was more important than the lofty stock price.

The Sky's the Limit for da Vinci Robots
Though Intuitive Surgical doesn't innovate in a way that drives consumers wild - like Amazon has, or Apple (Nasdaq:AAPL) has with its iPad - it is doing so within the medical equipment world. Its da Vinci surgical robots continue to be cleared for more and more uses, with the latest one being gall bladder removal.

Actually, scratch that - the latest use the surgical robot may have is as a way of repairing NASA's satellites. The nation's space agency is looking for ways to make such repairs more cost-feasible, and at less risk to human life. For patients, investors and surgeons (even if on a subconscious level), there's just something cool about the technology good enough to fix satellites also being used to fix people. The unique technology has trumped the high price of the stock. It has for years, in fact, because there's still nothing else quite like it. The fact that the company has grown its bottom line for five straight years - tripling it in the process - doesn't hurt either. Though again, that's an extension of innovation and keeping investors impressed.

Bottom Line
So no, don't sweat what seems like a frothy price. For ISRG, it's the norm. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future or Become Your Own Stock Analyst.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, James Brumley did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Biotechnology Stocks for 2016 (BSTC, OSIR)

    Discover some of the most promising micro-cap biotechnology stocks that investors can consider for their 2016 investment portfolio.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center