InMode Stock: Growth at a Reasonable Price (NASDAQ: INMD)
InMode Ltd. (NASDAQ: INMD) designs, develops and manufactures minimally invasive and non-invasive surgical products. With these products, the company aims to bridge the market gap between traditional laser treatments and plastic surgeries.
The company lost more more than 64% of its market capitalization year-to-date, despite continued revenue and earnings growth. In our view, such a steep price drop is not justified by fundamentals and we believe the stock could potentially be an attractive option for investors looking for value and growth.
First, we’ll look at the company’s financial statements, focusing primarily on the first quarter results. Next, we will look at INMD’s growth prospects, also comparing ourselves to its peers. Finally, we will determine a fair value for the stock based on traditional price multiples.
In the first quarter of 2022, InMode achieved record revenue of $85.9 million, representing an increase of more than 31% over the prior year quarter. Not only was revenue growth impressive, but so was GAAP net income growth of over 16% to $31 million. The main driver of growth has been strong demand for surgical technology platforms engaged in minimally invasive treatments.
InMode described in its presentation to investors the treatment gap between laser procedures and plastic surgery. The company aims to fill this gap, with innovative and minimally invasive solutions. The target audience is people between the ages of 35 and 60, who are looking for affordable, durable, outpatient procedures without the drawbacks of invasive plastic surgery.
In contrast, the industry’s median revenue growth rate was around 15%, EBITDA growth was around 11%, and EPS growth was around 12.6%. In all measures, IMND performed significantly better than its peers.
InMode’s margins remained strong, despite a slight decline in gross margins due to supply chain constraints and high shipping prices. Gross margin remained well above 80% and net margin remained above 40%. To put these numbers into perspective, the median gross margin for the industry is around 55%, which is about 30% less than INMD’s.
Despite the challenges, which are expected to continue through 2022, the company reiterated its guidance for the full year, driven primarily by strong demand forecast for its products. Geographically, the main contributor to sales should remain North America. Strong demand is also fueled by the easing of Covid-19 related restrictions. Additionally, analysts expect revenue and earnings per share growth in the coming years, but growth is expected to be slower than in previous years.
In our opinion, the impressive revenue and profit growth, combined with the high margins, proves that InMode has been able to identify the so-called treatment gap and successfully monetize it so far. Additionally, INMD demonstrated in the first quarter that it can handle supply chain challenges, which keeps us bullish on the stock.
Fundamentals, risks and valuation
After a 64% drop in the share price since the start of the year, the company’s valuation appears attractive. Many other stocks this year have lost a significant percentage of their market capitalization this year, but most of these stocks were not generating profits. In contrast, INMD generates profits, has high margins and also has strong cash flow from operations. They also have almost $400 million in cash, while their total debt is only $3 million. The company’s liquidity also appears to be in excellent shape with a quick ratio of 8.63 and a debt to free cash flow ratio of 0.52. This means that INMD can easily meet its short-term financial obligations.
In 2021, InMode also improved both its inventory turnover rate and its ROA.
Additionally, INMD maintained its guidance for 2022, expecting to successfully meet the challenges arising from the current market environment. But to get the fuller picture, we need to understand what factors could create headwinds for the business.
In our view, macroeconomic challenges, including rising commodity prices and shipping costs, coupled with a tight labor market, could create temporary short-term headwinds on the supply side, which would have a negative impact on the company’s margins. On the demand side, challenges could stem from the drop in consumer confidence, which is at its lowest level in 10 years, close to the lows observed in 2008-2009.
We expect low consumer confidence to eventually lead to lower consumer spending. In our view, this may negatively impact demand for non-essential products and services, including INMD products and services.
In addition to macroeconomic risks, there are also regulatory risks that InMode could be subject to. In the United States, InMode must receive FDA approval to market and sell its products. FDA approvals and pre-clearances can be lengthy (ranging from months to years) and expensive. In an industry where rapid innovation is key to staying ahead of the competition, delays in bringing products to market can have significant negative impacts. Currently, all INMD products have the required FDA approvals. Therefore, we do not believe there will be a serious impact in the short term, but for new products, clearance will need to be obtained.
Although the macro outlook has changed significantly, we believe there has been no material change in the fundamentals of the business. Additionally, due to strong cash flow generation, cash on hand of $400 million and low debt levels, INMD is unlikely to be significantly impacted by the potential increase in the cost of capital due to rising interest rates. In our view, regardless of the macroeconomic headwinds, the 60% price cut is not warranted.
A full list of risks can be found in the company’s annual report.
So the next question is how much should we pay for INMD shares?
When looking at traditional price multiples, price/earnings ratio, EV/EBITDA and P/CF, InMode appears significantly undervalued both relative to the industry median and its own historical averages. over 5 years. The company’s price-to-earnings ratio is just over 11x currently, which is more than 42% below the industry median and also almost 60% below its own historical average. In terms of EV/EBITDA and P/CF, the same trends can be observed.
In addition, the company also announced the repurchase of up to 1 million shares, thereby creating additional value for its shareholders.
In our opinion, based on price multiples, expected earnings growth and the announced share buyback program, the fair value of INMD’s shares is estimated to be between $38 and $54.
Key points to remember
InMode reported strong revenue and net profit growth in the first quarter
Rising shipping costs impacted the company’s gross margins, but they remained well above 80%.
INMD looks undervalued based on traditional price multiples, after a price decline of more than 60% since the start of the year.
The company announced a buyback program of up to 1 million shares, creating additional value for investors.