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A friend made a comment to me a few minutes ago, that Intuitive Surgical (NASDAQ:ISRG) might be "done". Initially I couldn't accept that opinion.

After all, here's a stock up 400% for me in the past 2 1/2 years. It forecasted to earn $1.67 this year and $2.27 next year, constantly beating street estimates.

But then I took a closer look.

At 107, the company is currently trading at 64xFY06 earnings and 47xFY07 earnings. Even if we take an aggressive stance, i.e., that ISRG will beat street estimates by 50% the rest of this year (one quarter is already in), that puts earnings at $2.20 for FY06. Attach a 40 multiple on this (aggressive again) and the stock is fairly priced today at $88.

Now, let's say earnings grow at 35% per year for the next 3 years - that will put earnings at $5.40 in 3 years. At a fair multiple at that time of 25 (after all, it's aggressive growth cycle will probably be winding down by then). That makes the stock fairly valued in 3 years at 135, implying an equity annual growth rate of 8%. If we assume that the market risk premium is at 4%, at a beta of 2.1, ISRG should return at least 13.65% per year for the additional risk one is asked to take with this high flier.

So, at the end of the day, I think my buddy might be right - ISRG is overpriced, even using my aggressive estimates. On the charts, it looks like I may be able to get out of it between 111 and 113 in the next few days (if the current market rally holds up for a while longer), so I think I'll finally be selling this long-term winner.

Disclosure: Author is long ISRG at time of writing