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

Intuitive Surgical’s ISRG strong third-quarter results — 23% revenue growth and 30% earnings growth—came with one major flaw: margin pressure. Pro forma gross margin slipped 90 basis points (bps) year over year to 68%, squeezed by a trifecta of structural and near-term headwinds: tariffs, an unfavorable cost mix tied to da Vinci 5 and Ion, and higher facility expenses. Tariffs alone accounted for the full 90-bp drag, with additional pressure from lower-margin platform mix and elevated service costs, partly offset by internal cost-reduction efforts.

However, management has lifted its gross-margin outlook to 67–67.5% for 2025, citing stronger fixed-cost leverage and better-than-expected cost reductions, as well as a smaller full-year tariff hit—now pegged at 70 bps. But fourth-quarter gross margin is expected to dip slightly below 67%, raising investor concerns that the mix and spending trend may continue to weigh on profitability.

Although margin pressure is likely to continue, the company is working on several initiatives that are expected to offset the pressure. First, cost-reduction initiatives—already cushioning the third-quarter impact—should rise as manufacturing scale grows alongside rapid da Vinci 5 adoption. Second, direct distribution in Italy, Spain and Portugal, beginning in the first half of 2026, is expected to be slightly accretive to earnings.

Meanwhile, platform mix will be a critical swing factor. da Vinci 5 and Ion continue to scale rapidly, but both carry lower margins today. As volumes increase and cost curves bend, these platforms could transition from margin dilutive to neutral—or even accretive—over time.

So, can ISRG sustain margins above 67% long term? The answer hinges on tariff resolution, mix normalization and execution of cost programs. For now, the company appears positioned to defend margins at or slightly above the high-67% range, but sustained expansion will require more help from operating leverage, and less from tariffs.

Peers Facing Tariff Pressure

Medtronic MDT delivered accelerating revenue and earnings growth, but profitability remains pressured by tariffs and mix. MDT repeatedly highlighted tariff headwinds, with fiscal second-quarter gross margin carrying a 20-bp drag and full-year fiscal 2026 expected to absorb nearly $185 million in tariff costs. While MDT expanded gross margin by 70 bps operationally, negative mix from Cardiac Ablation and Diabetes diluted gains. MDT emphasized that pricing and cost-efficiency programs continue to offset part of the pressure, yet operating margin is still guided to decline nearly 50 bps, including tariffs. MDT maintains that sustained cost actions and scale should support margin stability as growth drivers gain traction.

Stryker SYK again posted strong top-line momentum, but tariffs remain a meaningful profitability constraint. SYK noted that tariff pressure in the third quarter increased significantly sequentially, with gross margin facing nearly $200 million full-year impact despite still expanding 50 bps on mix and cost improvements. SYK stressed that disciplined SG&A control and manufacturing optimization helped lift operating margin by 90 bps, but in the absence of tariff burden, margin expansion would have been even stronger. SYK repeatedly emphasized its ability to outrun tariff pressure through pricing, mix and scale, arguing that its diversified portfolio and sustained 9–10% organic growth position SYK to defend profitability even as tariffs escalate year over year.

ISRG’s Price Performance, Valuation and Estimates

Shares of ISRG have gained 9.2% in the year-to-date period compared with a 4.2% rise for the industry.

From a valuation standpoint, Intuitive Surgical trades at a forward price-to-earnings ratio of 60.09, above the industry average. But it is still lower than its five-year median of 71.54. ISRG carries a Value Score of F.

The Zacks Consensus Estimate for Intuitive Surgical’s 2025 earnings implies a 17.3% rise from the year-ago period’s level.

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

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

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