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

Intuitive Surgical ISRG reported a second-quarter 2025 gross margin of 67.9%, down from 70% in the prior-year period. While the company's top-line performance was solid, the margin compression highlights structural shifts underway within its operations and product mix.

A key driver of the margin contraction is the increasing contribution of newer, lower-margin platforms, specifically the da Vinci 5 and Ion systems. Although these technologies are central to ISRG’s next growth chapter, they come with elevated manufacturing and service costs, particularly in the early phases of commercialization. The da Vinci 5, in broad launch across the United States, requires more complex support infrastructure, pushing service costs higher.

Another notable factor is the impact of depreciation from recent capacity investments. ISRG's ongoing expansion, including the opening of a 187,000 sq. ft. facility in Bulgaria, adds incremental overhead even before full operational efficiency is realized. This strategic buildout reflects management’s commitment to scale production globally but creates short-term margin headwinds.

Tariff-related expenses added further pressure, reducing gross margin by approximately 60 basis points in the second quarter alone. The broader trade environment, especially U.S.-China tariff dynamics, is expected to exert an approximate 100 basis points annual drag on gross margin.

While these challenges are largely transitional, they reflect ISRG’s evolving business model. Management anticipates that over time, scale efficiencies, maturing service operations, and increased procedure volumes on da Vinci 5 and Ion systems will help recover margins. However, in the near term, investors should expect continued volatility in gross profitability as the company navigates this shift from a legacy high-margin portfolio to a broader, innovation-driven ecosystem.

Peer Performance

Boston Scientific BSX reported an adjusted gross margin of 69.4% in second-quarter 2025, down 100 basis points year over year. The decline was primarily due to inventory charges related to the discontinuation of the ACURATE valve. Despite this headwind, the company benefited from a favorable product mix and continued operational productivity, which helped partially offset the impact. GAAP gross margin was 67.7%. Management remains confident in its ability to expand gross margin over the long term, supported by ongoing cost-efficiency programs, manufacturing optimization, and the strength of high-growth, high-margin portfolios across its structural heart and neuromodulation segments.

Thermo Fisher’s TMO second-quarter 2025 adjusted gross margin was 41.3%, down about 80???bps from the year-ago level. Management said tariffs and FX shaved roughly 150???bps off this margin (about a 5% drag on operating profit), partly offset by nearly 70???bps of productivity gains. CFO Stephen Williamson noted these headwinds translate to roughly a 140???bps hit to reported margins. In short, trade-related costs and mix shifts narrowed gross margins, though strong cost-control measures (productivity improvements) helped cushion the decline.

ISRG’s Price Performance, Valuation and Estimates

Shares of ISRG have lost 5% in the year-to-date period compared with the industry’s decline of 6.8%.

From a valuation standpoint, Intuitive Surgical trades at a forward price-to-earnings ratio of 56.6, above the industry average. But, it is still lower than its five-year median of 72.4. ISRG carries a Value Score of D.

The Zacks Consensus Estimate for Intuitive Surgical’s 2025 earnings implies a 11.3% rise from the year-ago period’s level.

The stock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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