Margins Face Tariff Pressure: Is ISRG's Profitability at Risk?

Core Insights - Intuitive Surgical (ISRG) reported strong third-quarter results with 23% revenue growth and 30% earnings growth, but faced margin pressure due to tariffs and cost mix issues [1][9] - Management has revised its gross-margin outlook for 2025 to 67–67.5%, citing better cost reductions and a smaller tariff impact [2][9] - The company is implementing cost-reduction initiatives and expanding direct distribution in Europe to help stabilize margins [3][4][9] Financial Performance - ISRG's gross margin decreased by 90 basis points year-over-year to 68%, primarily due to tariffs, unfavorable cost mix, and higher facility expenses [1][9] - The fourth-quarter gross margin is expected to dip slightly below 67%, raising concerns about ongoing profitability pressures [2] - The Zacks Consensus Estimate for ISRG's 2025 earnings suggests a 17.3% increase compared to the previous year [11] Competitive Landscape - Medtronic (MDT) and Stryker (SYK) are also experiencing tariff-related profitability pressures, with MDT expecting nearly $185 million in tariff costs for fiscal 2026 [6][7] - MDT's gross margin faced a 20-bp drag from tariffs, while SYK noted a nearly $200 million full-year impact from tariffs despite operational improvements [6][7] Valuation Metrics - ISRG shares have increased by 9.2% year-to-date, outperforming the industry average of 4.2% [8] - The company trades at a forward price-to-earnings ratio of 60.09, which is above the industry average but lower than its five-year median of 71.54 [10]