InMode: High Growth, High Margin Medical Device Company On Sale (NASDAQ:INMD)

Abstract of the paper

For a long time, I worked for Israel-based InMode Ltd. (NASDAQ:INMD).Currently, this company Underrated. First, the market underestimates InMode’s market share in a growing industry. Second, the company’s profitability is grossly underestimated. With a gross profit margin of over 80% and a net profit margin of over 40%, this company is a bona fide breadwinner. Finally, we believe the market is overreacting to short-term concerns such as lower gross margins, inflation and lack of consumer demand. This article explains why I think InMode Ltd. is too good an opportunity to pass up.

Company Profile

InMode Ltd. is a medical device company that develops and manufactures medical devices. Do non-invasive or minimally invasive aesthetic and wellness solutions. Their proprietary technology could disrupt the industry and continue to gain market share. The main technologies that the company currently uses are his four types. Radio Frequency Assisted Lipolysis, Deep Subcutaneous Fractional RF, Hands-Free Body Remodeling, Hands-Free Facial Remodeling. Each of these is used in a different way, but the main idea of ​​all of them is to use radio frequencies to improve the aesthetics of the human body. Developed by a company co-founder with years of experience.

Why InMode Is Underrated

Expand market share in growth industries

The market that InMode has established is the non-invasive/minimally invasive cosmetic treatment market. This market has increased significantly over the past decades as consumers continue to seek more and more aesthetic treatments.

InMode Ltd.’s current products are well positioned for its continued success as an industry leader. Many times in my research, management mentioned how his InMode was trying to fill the “treatment gap.” The idea of ​​this treatment gap is that the industry is in the middle of the transition of aesthetic treatment options from plastic surgery to laser surgery. We believe there is a balance between precision and efficiency, such as surgery. I’m here.

high profitability

One of the first things that caught my eye when I first saw InMode Ltd. was their efficiency in generating cash flow. The company’s profitability is unmatched in the industry and remains a major differentiator from its peers. With gross margins in excess of 80% and net margins in excess of 40%, it’s rare to find a company that maintains such high margins while generating double-digit revenue each year.

The reason I call this mis-pricing is that InMode has a better margin profile than its peers, so economic and industry downturns don’t have much of an impact on the company as a whole. With a large margin of safety on its margins, the company is well protected against severe downturns as it can give up short-term margins in order to maintain a solid customer base.

Overreacting to short-term news

The final big pricing fallacy we see at InMode Ltd. is that the market appears to be overreacting to short-term news related to lower gross margins, inflation and lack of consumer demand. While it’s important to know that short-term economic events could hurt InMode in the near future, there are reasons to believe that negative news will have any impact on the company’s long-term growth. there is no.

In recent quarterly earnings releases, in-mode finance It shows a slight decline in gross margin. The reason this doesn’t worry me at all is that even though it’s gone down a bit, the company still maintains a gross margin of over 80%. It may seem difficult to maintain such high gross margins. Even if his gross margin drops to 75%, he already has a safe margin. Some investors are concerned that inflation will continue to hamper the company’s profitability, as will the slight decline in gross margins, but I believe that by the end of his fiscal year 2023, inflation will continue to grow as it does now. I’m sure it won’t be a problem.

The last thing I want to note about the short-term news is that there is a belief that if we do get into a recession, customers are less likely to undergo non-invasive cosmetic procedures. I think we’re going into a mild recession, albeit a slight decline. With that in mind, we believe InMode customers will continue to use their products. The customer base they have established is worldwide, and physician offices that purchase InMode’s products continue to do so despite economic uncertainty.

discounted cash flow valuation

The first valuation method I used was discounted cash flow (“DCF”) analysis using free cash flow to the company. First, to calculate InMode’s WACC, we used bottom-up beta to incorporate industry risk and peer capital structure. Given the 5-year leveraged beta of 2.2, I think the bottom-up beta is a better representation of the risk to peers and the market as a whole. For the risk-free interest rate, we used updated 10-year government bonds and a conservative market risk premium of 6.77%. Another thing to note about InMode is that it is virtually debt-free. So that’s one of the reasons the bottom-up beta is 1.00 instead of 2.20.

Free Cash Flow to Corporate Models (“FCF”) projected earnings for InMode over the next 20 years based on industry and company-specific research. I believe there is still significant growth opportunity in all of the company’s products, and I have no doubt that the company will continue to develop innovative, industry-leading products to further enhance its growth prospects. there is no. To account for the uncertain economic environment over the next two years or so, we have projected earnings below analyst consensus, with a wider margin of safety. Using the calculated WACC to discount future free cash flow, we arrive at an intrinsic stock price of $48.91. This represents an underestimation of almost 42%.

Relative evaluation

In addition to calculating discounted cash flow, we also wanted to see where InMode is trading relative to its peer group. The companies I have included in my relative evaluation include:

• AdaptHealth (AHCO)
• Waters (Watt)
• Hologic (horks)
• PerkinElmer (PKI)
• intuitive surgery (ISRG)
• Kidderort (QDEL).

There are several companies that you can assess how InMode is rated by looking at who you compare InMode to. InMode makes products that have never been seen before, but you can look at companies competing in similar industries and piece them together. No matter how you look at it, it’s clear that he greatly underestimates InMode, as shown in the chart above. Two companies with similar or lower multiples of AdaptHealth and QuidelOrtho have lower margins and profitability than InMode.

With this in mind, we felt very comfortable assigning a higher multiple than the current price.We chose an EV to EBITDA multiple of 15.5 for InMode’s next 12 months because that is InMode’s We felt it best represented profitability, growth, efficiency, and risk. An argument can easily be made that 15.5x is conservative and that multiples of it should be 20x. However, for the purpose of the model, I felt that 15.5x was appropriate for InMode. At NTM’s EV to EBITDA multiple of 15.5, this translates to an implied stock price of $50.46, representing an undervaluation of over 46%.

risk

Political/regulatory risk

As mentioned at the beginning, the company is headquartered in Israel. Uncertainty in the Middle East, especially in Israel at the moment, can pose political risks. It’s worth mentioning, but considering the company’s global nature, I don’t think it’s a big problem, and I don’t have many assets in Israel, so if I wanted to, it would be easy to relocate.

Changes in consumer demand

As mentioned in the Pricing Incorrect section, there are long-term effects of the economic downturn, including significant cuts in household spending, which could adversely affect InMode and the industry as a whole. Over time, consumers may want to change the way they receive non-invasive beauty treatments, and a major shift from the industry will obviously have a huge impact on InMode’s business.

competitive risk

It’s also possible that another company could come up with a more efficient and cheaper technology without taking that risk. This means InMode risks losing customers to cheaper alternatives. New competitors may enter the market, but I believe InMode’s patented technology has allowed the company to create an economic moat and build strong relationships with physicians around the world. increase.

Conclusion

I was pleasantly surprised by what InMode Ltd found. We believe this business model has led the company to continued success. The fact that InMode is so underrated right now makes me even more excited about its future.After conducting research on the company, InMode’s long-term growth prospects and InMode Ltd.’s stock buy.