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Nick's Pick of the Week: InMode

It's OK, you can relax now, for the much awaited stock-of-the-week is here. I flirted with Ford (ticker: F) which, due to a great quarter with a sizeable earnings beat and encouraging EV sales, has been up about 22% just in the last week. However, I ultimately went with a lesser-known company called InMode (Ticker: INMD) for the second stock to highlight in this series.

Based in Israel, InMode is a company that manufactures and sells aesthetic medical devices for plastic surgery, gynaecology, dermatology, ophthalmology, and several other “-ologies.” However, what makes this company so interesting is the fact that their devices are minimally invasive. InMode’s devices are powered with energy-based technologies like radio frequency and laser, allowing doctors to carry out procedures like fat reduction, hair removal, and muscle tightening without calling on the scalpel. You can imagine why the demand for non or minimally invasive treatments is rapidly increasing—unlike with a classic invasive surgery, there is no need for anesthesia, there’s significantly reduced risk of scarring, and much less downtime post-op.

The Israeli enterprise sells its devices directly to doctors in markets all over the world, but the vast majority of its revenue (64% in Q2 to be precise) comes from the U.S., which has seen tremendous growth in demand for minimally invasive skin tightening and fat reduction procedures. Specifically, the total number of procedures employing energy-based technologies saw a 128% increase YoY from 2020-2021. Furthermore, industry revenue from these minimally invasive procedures in the U.S. increased by 52% over the same timeframe. This impressive growth in energy-based treatments isn’t limited to the U.S.; in fact the global energy-based aesthetic devices market is projected to grow at 10.2% per year from 2021-2028.

InMode is in prime position to capitalize on this burgeoning global demand for energy-based cosmetic procedures. Per CEO Moshe Mizrhay, the company had 14,000 units in active use by surgeons/medical experts at the end of Q2, compared to 11,600 devices in circulation as the 2021 calendar year closed. From a financial perspective, INMD followed up a solid first quarter with an even better second—it has continued the trend of historically growing revenue and operating income (evidenced by Exhibits A and B, which display quarterly results dating back to 2019)

Additionally, it would be remiss not to acknowledge InMode’s impressive margins. Gross margins have consistently been above 80% over the last three years (profit margin is currently about 43%), which is especially impressive considering the macroeconomic headwinds like inflation and supply chain issues that have increased production costs across all industries.

Despite all of this, the company’s stock has had a less than impressive year, to say the least. Even after the rally over the last couple of weeks, INMD is down 46% YTD, which is considerable given that the S&P 500 has only declined 13% YTD. Naturally, you’re probably wondering why the stock’s received such poor treatment—especially because I’ve just outlined the company’s sound fundamentals and encouraging results through the first two quarters.

I would chalk the steep decline up to two things. Firstly, while the market has struggled in general, growth stocks (shares of companies that are expected to grow sales/earnings at higher rates than the market average) like INMD have experienced even larger sell-offs. Secondly, INMD soared in 2021—the stock price appreciated by 191% (see steep increase in market cap as show in Exhibit C), reaching a P/E of about 60x (see Exhibit D for historical P/E). The market clearly felt that this valuation was too high; however, while a correction was warranted, I think what we’ve seen is an overreaction.

Exhibit C

Exhibit D

Now let’s talk risks. In the short-term, further Covid-19 waves could result in the prioritization of required/emergency surgeries, putting elective surgeries (like cosmetic procedures) on hold. While this certainly wouldn’t be a positive for InMode, this hasn’t seemed to be too problematic for the company so far as they significantly grew revenue in 2020 and 2021 (when many elective surgeries were being postponed or cancelled). A recession could also pose a threat to the Israeli enterprise as cosmetic procedures would be classified as non-essential, discretionary spending. It’s likely that most people—except for maybe Dolly Parton or a Kardashian—would wait until the economy rebounded to get tightened, plumped, or filled (my apologies if that sounded weird…that certainly wasn’t my intention), instead electing to allocate almost all of their potentially decreased earnings to consumer staples like food, household goods, hygiene products, etc.

Typically I wouldn’t suggest buying a stock that’s rallied by about 50% in the last month (especially if you’re not interested in holding for an extended period), but I think InMode is still undervalued and a buy at its current P/E of 18x (which is back to where it was pre-Covid). Between the company’s stellar margins and growth prospects in new markets outside of the U.S. (where it currently generates about half of its business), I feel that INMD is well-positioned for long-term success and provides an intriguing investment opportunity.

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