InMode (INMD) designs, develops, manufactures, and markets minimally invasive aesthetic medical products. In addition, it designs, develops, manufactures, and markets non-invasive medical aesthetic products that target an array of procedures.
These include permanent hair reduction, wrinkle reduction, facial skin rejuvenation, skin appearance and texture, cellulite treatment, and superficial benign vascular and pigmented lesions.
The company was founded by Michael Kreindel and Moshe Mizrahy on January 2, 2008, and is headquartered in Yokneam, Israel.
We believe the market is seriously mispricing InMode at current levels, and its recent earnings report helps confirm that. As a result, we are bullish on the stock.
Recent Earnings Results
InMode recently reported earnings and delivered another strong quarter. It beat earnings per share by $0.02 and revenue by $2.47 million. Total earnings per share came in at $0.40 and total revenue of $85.92 million for the quarter.
This equated to revenue and earnings growth of 31.2% and 17.6% year-over-year, respectively. More importantly, the company reaffirmed its guidance for 2022. It expects revenue between $415 million and $425 million and earnings per diluted share between $2.06 and $2.11.
Furthermore, despite supply chain disruptions, InMode expects to maintain gross margins between 84% to 86%. The company has done a great job of proactively dealing with these disruptions without raising prices by having at least three suppliers for each component.
Interestingly, the company likely has the pricing power to raise prices. However, management doesn’t want to do so during the middle of the year, opting instead to wait until the end of the year.
This demonstrates the company’s focus on maintaining good relationships with its clients by not exploiting them while using inflation as an excuse, like some other companies have been doing.
Growth Catalysts
The primary growth catalyst for InMode is its line of high-quality products that have generated excellent returns on investment for its clients. This has led to 30% of existing customers purchasing new devices for their practice.
As time goes on and new products are introduced, more repeat orders will follow. This is important because it’s much less expensive to sell to existing customers instead of acquiring new ones.
In addition, the increasing demand for the company’s devices has also led to an increase in consumables and services revenues, which is a recurring revenue stream.
In the fourth quarter of 2021, consumables and services accounted for 11% of revenue. Just one quarter later, it accounts for 16% of revenue. This impressive increase in just a few months is a very positive sign that provides strong evidence that its products maintain a popular status.
Moreover, the company is now trading at a very low valuation due to the market’s fear-based sell-off over the past several months. Thus, when the dust finally settles, InMode should revert to a fair value which we believe is much higher.
Valuation
To demonstrate how undervalued InMode currently is, we will perform a reverse-engineered discounted cash flow model to determine the required growth rate to justify the current valuation. At the current price of $24.35, the required growth rate is as negative:
As a result, the market is pricing InMode as if its free cash flows were going to shrink at a compound annual growth rate of -1.81% over the next 10 years.
This is way too pessimistic for a company that is expected to see double-digit growth in the coming years and is likely to see a positive CAGR over the next decade. Indeed, we have put together the table below to demonstrate the valuation at different growth rates:
As you can see, even if the growth rate was in the single digits, the valuation should be much higher.
Headwinds
As great as InMode is, it still faces headwinds just like all other hardware companies. In addition to the supply chain disruptions that it has managed to effectively manage, it has been seeing a slowdown in Asia.
More specifically, China and Japan have seen lagging sales due to their strict COVID-19 restrictions. Salespeople have been unwilling to take on the task of dealing with these restrictions in order to do business there.
In addition, China continues to implement lockdowns due to the ineffectiveness of their homegrown vaccines, in conjunction with their refusal to use more effective western vaccines.
As a result, the opportunities in these regions are not being realized to their full potential at the moment.
Wall Street’s Take
Turning to Wall Street, InMode has a Strong Buy consensus rating, based on four Buys assigned in the past three months. The average InMode price target of $63.75 implies 161.81% upside potential.
Price targets range from a low of $50 to a high of $90 per share.
Final Thoughts
InMode is an extremely well-run company that produces high-quality products that can sell at over 80% gross margins. Despite this, the market has grossly mispriced the stock for negative growth over the next 10 years.
As a result, we are very bullish on the stock.
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