If you’ve never heard of InMode Ltd. (NASDAQ:INMD), they’re a med-tech company specializing in body treatment administered via radiofrequency technology. It’s a pretty undercovered stock that has fallen from highs of $99.27 late last year to just above $25 at the time of writing this article. Apart from the current market situation of rising rates, a large reason for the selloff was also the fact that the company did not meet analysts’ expectations in Q1 2022, which saw the price of the stock tank over 30% in April 2022.
As you read on, I analyze the company’s prospects and past financial performance, and explain why I believe that InMode stock could prove to be a good investment at its current valuation.
Industry and demand growth
InMode, being a med-tech company focused on beauty care and treatment, is heavily reliant on the beauty industry. The company is best known for its treatment products for contouring (body and facial), hair removal and feminine wellness. The beauty industry, in general, is set for a strong rebound after declining in recent years, with optimistic growth numbers in beauty product sales. In particular, professionals expect the demand for skincare and haircare to grow the most. This is entirely possible with people finally recovering from financial setbacks due to the Covid-19 pandemic, hence allowing them to spend more on such products.
InMode stands to gain from the increased demand for beauty treatment, especially since it offers considerably sought-after treatment in areas of body, hair and feminine care – all of which are poised to see a healthy recovery in demand in 2022 and the years to come.
Beauty products, like fillers and neurotoxins, often have a questionable reputation due to their invasive nature. As such, many companies have gone on to produce less-invasive treatment products to serve the same purposes. InMode produces beauty treatment products which are easy to use and minimally invasive – two extremely important qualities. Some products, like Evoke and EvolveX, are completely non-invasive to patients, while still delivering advanced treatment for the face and body.
The company’s innovative use of advanced technologies to provide beauty treatment has definitely been recognized over the years through multiple awards conferred by industry experts. I strongly believe that the company has what it takes to continue on its upward trajectory.
Q1 2022 results
While multiple analysts downgraded their ratings and price targets for INMD stock, it cannot be denied that their results were not that big of a miss. The company did $85.9m in revenue and a non-GAAP earnings-per-share of $0.40. This represents a YoY growth of 31% and 18%, respectively. In addition, the company provided revenue guidance of between $415m and $425m for 2022.
This represents a revenue growth of over 15%, and almost 20% on the high side. While this is understandably significantly less than 2021’s growth of 73.49%, one must understand that we are currently in a high-inflation environment. Consumers are going to be hit as they start to cut back on spending as borrowing costs increase due to the rate hikes. In addition, consumers have more incentive to save due to the higher yields.
Since InMode’s offerings are mostly non-essential treatment products focused on aesthetics, there’s no doubt that it has a considerable chance of reporting significantly lower numbers, since its customers may choose to consume less of such products. As such, I do not think that the weaker guidance is necessarily indicative of any problem regarding the company and its operations. In addition, the company still registered decent growth numbers for the quarter. It has every chance to beat its full-year expectations if market conditions become more favorable.
The company’s historical financial performance has been nothing short of remarkable. Let’s go over a few metrics.
The company has gone from $53.46m in sales in 2017 to $357.57m in 2021. This is an outstanding overall increase of 569%. The growth in sales each year has also been impressive, with increases of 87.37%, 56.11%, 31.81% and 73.49% for years 2018, 2019, 2020 and 2021 respectively. Strong sales growth is a good indicator that there is strong demand for InMode’s products.
The company’s net income has gone from $8.82m in 2017 to $164.97m in 2021, representing a staggering 1770% overall increase. The growth in net income each year has also been remarkable, with increases of 153.67%, 173.32%, 22.71% and 119.87% for years 2018, 2019, 2020, and 2021, respectively. The strong and explosive increase in net income over the past few years is a strong indicator that the company is improving its bottom line significantly by becoming more profitable and managing its costs in an efficient manner.
Diluted earnings per share
The company’s diluted earnings-per-share has gone from 0.13 in 2017 to 1.92 in 2021, representing an explosive 1377% overall increase. The growth in diluted earnings-per-share each year has also been impressive, with increases of 153.56%, 135.02%, 10.95%, and 115.18% for years 2018, 2019, 2020 and 2021, respectively. This is an even more specific indicator of the company’s impressive profitability, as it also considers how much profit is distributed to each share.
Free cash flow
The company’s free cash flow has gone from $14.42m in 2017 to $173.95m in 2021, representing a massive 1106% overall increase. The growth in free cash flow each year has also been impressive, with increases of 153.16%, 68.51%, 28.04%, and 120.85% for years 2018, 2019, 2020 and 2021, respectively. The strong growth in free cash flow shows that the company is highly profitable and more than able to fund its operations while paying off its various expenses. To give some perspective, the company has total liabilities of $62.74m. The company could pay off every single liability with about a third of its free cash flow.
The company has a current trailing 12-month price-to-earnings ratio of 12.90. This is generally regarded as a healthy price-to-earnings ratio, and it’s definitely on the lower side, considering that the market average price-to-earnings ratio is just above 20. This is a good indicator that the company is not overvalued by any means, and could very well be undervalued at current prices.
In my valuation analysis, I will be using a simple 10-year EPS forecast.
I will be using the above metrics to carry out my valuation analysis. Allow me to elaborate on each of them.
Projected annual change in shares outstanding
I’ve gone with an average annual increase of 10% in shares outstanding. The company has a history of issuing new shares, growing from 65.45m to 86.02m in diluted shares outstanding from 2017 to 2021. I expect this trend to continue, though it is likely to stop at some point and there may be a good chance of a share buyback due to the company’s massive free cash flow. I consider my assumption in this area to be on the conservative side.
Earnings per share
I will be using 1.92 for the EPS at the reference point, which is the diluted EPS of the company in 2021.
Projected annual growth rate
I’ve gone with an average annual growth rate (in earnings) of 30%. This is lower than the company’s numbers in recent history, but it is good to note that the company will see earnings growth slow down in the long-run. For a 10-year forecast, I do believe that an average annual growth rate of 30% is probable, as the company still has much room for innovation and expansion.
Minimum annual rate of return
I’ve gone with a desired annual return of 12.5%, which is slightly higher than a typical good-quality ETF.
Margin of safety
I will be using a 20% margin of safety as medical technology can often be unpredictable in nature, and complications or the rise in competition may hinder InMode in many ways. I consider this margin to be a fair one, considering the industry that InMode operates in.
I will be using a projected P/E of 15, which is a fair valuation for stocks in this industry. It may even be on the low side.
Forecast and price target
Our forecast has led us to a price target of $37.71 a share, which we assume will yield us a 12.5% return yearly. The price target itself represents an approximate 50% upside from current valuations (at the time of writing this article). I would also like to add that my assumptions are considered to be on the conservative side, and renowned institutions like Barclays and Needham have more optimistic estimates and much higher price targets of over $90 for this stock.
To close, I do believe that InMode stock could prove to be a very decent investment, especially considering its current valuation. The company holds up extremely well financially with its high profitability and strong cash flow generation. The demand for its products is likely to see a rebound in the coming years as the beauty industry fights back from a drop due to the pandemic. InMode has a good chance of staying relevant and competitive through its strong bottom line and constant innovation. I will conclude my analysis with a price target of $37.71, and a rating of “Strong Buy.”