ISRG's Gross Margin Falls on Product Transition and Trade Pressures

Core Insights - Intuitive Surgical (ISRG) reported a second-quarter 2025 gross margin of 67.9%, down from 70% in the prior-year period, indicating structural shifts in operations and product mix [1][9] - The margin contraction is driven by the increasing contribution of newer, lower-margin platforms, particularly the da Vinci 5 and Ion systems, which have higher manufacturing and service costs [2][5] - Depreciation from recent capacity investments, including a new facility in Bulgaria, adds overhead costs, impacting short-term margins [3][9] - Tariff-related expenses reduced gross margin by approximately 60 basis points in Q2, with an expected annual drag of about 100 basis points [4][9] - Management anticipates long-term margin recovery through scale efficiencies and increased procedure volumes, despite near-term volatility [5][9] Peer Performance - Boston Scientific (BSX) reported an adjusted gross margin of 69.4%, down 100 basis points year over year, primarily due to inventory charges, but benefited from a favorable product mix [6] - Thermo Fisher (TMO) had an adjusted gross margin of 41.3%, down about 80 basis points, impacted by tariffs and foreign exchange, though productivity gains helped cushion the decline [7] Valuation and Estimates - ISRG shares have lost 5% year-to-date, compared to the industry's decline of 6.8% [8] - The forward price-to-earnings ratio for ISRG is 56.6, above the industry average but lower than its five-year median of 72.4 [11] - The Zacks Consensus Estimate for ISRG's 2025 earnings implies an 11.3% rise from the previous year [12]