InMode’s stock could potentially double (NASDAQ: INMD)


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Investment thesis

In Mode (NASDAQ: INMD) is one of the world’s leading suppliers of non-invasive surgical machines. Their turnover has grown at an incredible rate over the past few years (73%, 5 year average), and it is an extremely profitable business (46% net margin). Due to the recent scare of the Omicron variant, interest rate hikes from the Federal Reserve and anticipation of a sluggish market, growth stocks have been hit. This has created opportunities for investors. InMode is definitely one of them. I think InMode presents a great opportunity for an investor because:

  1. Their income and profits have grown at an incredible rate, and the trend will continue for the foreseeable future. The demand for their products continues to grow.
  2. They are well protected by an economic divide, as shown by their exceptional profitability. The distance between InMode and the next best competitor is huge.
  3. Their balance sheet is loaded with liquidity ($ 387M) with negligible debt ($ 3M). The strong balance sheet will support their growth plan even during tough times.

Income growth and ever increasing demand

The revenue and profit growth shown by InMode over the past few years is simply amazing. Looks like a plane leaving the runway. On average over 5 years, turnover has increased by 73%. Profit growth is following well (average EPS growth percentage is 600% over the past 5 years, due to its small denominator). These trends are presented below.

InMode revenue and net income
Data by YCharts

InMode revenue and net income

Source: Investor Relations

This growth in income and profits is not going to stop anytime soon. On the last results conference call, executives said attendance at their workshops is at an all time high and their international expansion plan is on track. In addition, InMode has an impressive pipeline of products in development and is launching new products to increase their reach. A few months ago they announcement the launch of the EvolveX platform to provide a hands-free, no-downtime solution to transforming the whole body.

In addition, their sales are not severely affected by the supply chain disruption. Using their various distribution and supply networks that they established during the pandemic, InMode is successfully managing component shortages. Therefore, I expect their impressive growth trajectory will not end anytime soon.

Economic gap and exceptional profitability

InMode is one of those companies that has succeeded in creating a significant economic moat around themselves, and the gap between InMode and the next competitor (eg Cynosure, CONMED, etc.) is quite large at this point. Given their technological superiority and the patent protections on their technology, I think they should be able to maintain this economic divide for the foreseeable future. In addition, the cost of switching an already installed base (over 10,000 at this stage) is substantial, which will also help them maintain their market share.

This strong economic gap in a lucrative field translates well into profitability. Overall (gross profit margin, EBIT margin and net income margin), InMode’s profitability metrics are out of the ordinary. Gross profit margin (86.31%), EBIT margin (46.17%) and net profit margin (46.08%) are several times higher than the industry median. The meaning of each margin can be found in This article. Measures of profitability compared to the industry median are shown below.

INMD stock grade

Source: In Search of the Alpha

Solid balance sheet

InMode’s financial strength is also excellent, which is hardly surprising given its profit margins and ability to generate cash. Cash flow from operations increased from $ 3.0 million in 2016 to $ 163.6 million in 2021, and is keeping pace with revenue growth. With this cash-generating capacity, InMode has over $ 380 million in cash on its balance sheet with negligible debt. Unsurprisingly, their liquidity is high with a current ratio of 8.17x and a rapid ratio of 7.81x.

Given this solid balance sheet and high liquidity, their expansion plan will be adequately supported. Their profitability and balance sheet will not be affected by rising interest rates because they have negligible debt. In addition, thanks to their strong ability to generate liquidity, they will not really need to take on debt to support their growth. Their international expansion plant should not be affected even by difficult times. InMode’s current footprint and its international opportunities are summarized below.

World Organization InMode

Source: Investor Relations

Estimation of intrinsic value

I used DCF model to estimate the intrinsic value of INMD. For the estimate, I used operating cash flow ($ 163M) and the current 7.5% WACC as the discount rate. For the base case, I have assumed operating cash flow growth of 45% (Seeking Alpha Estimate for EBITDA growth) for the next 5 years and zero growth thereafter (zero terminal growth). For the bullish and very bullish case, I assumed operating cash flow growth of 48% and 50%, respectively, for the next 5 years and zero growth thereafter. Given their plan for international expansion and their revenue growth trajectory, I think a 45-50% growth in operating cash flow is certainly achievable. Importantly, adding a new product line to the already impressive existing lines will only increase the likelihood of revenue acceleration.

The estimate revealed that InMode’s intrinsic value is almost double the current share price. The recent drop caused by the Omicron variant and the Federal Reserve’s interest rate hike has opportunities created for investors, and InMode is definitely one of them. I think the InMode share price will rebound well after experiencing some volatility over the next couple of months.

Price target

Upside down

Base case

$ 103.54

91%

Bullish case

$ 113.96

111%

Very bullish case

$ 121.38

124%

The assumptions and data used to estimate the target price are summarized below:

  • WACC: 7.5%
  • EBITDA growth rate: 45% (base case), 48% (bullish case), 50% (very bullish case)
  • Current operating cash flow: $ 163 million
  • Current share price: $ 54.13 (07/01/2022)
  • Tax rate: 30%

Risk

The recent surge in Omicron variant puts pressure on the economy and causes labor shortage problems. Combined with the Federal Reserve’s hike in interest rates, the stock market is going through a rough patch (especially true for a growth-oriented stock like InMode). However, I believe labor shortage, supply chain problem and inflationary pressure will be brought under control by the end of 2022, and the overall stock market will perform well after experiencing volatility in the first few months of the year. Even with the rate hikes, the interest rate is historically low, which helps the stock market. I don’t expect the bond yield to fall too far beyond its pre-pandemic level (~ 3-3.5% for the 30-year Treasury rate). The trend in 30-year Treasury rates is shown below.

30-year cash rate
Data by YCharts

Conclusion

InMode presents a great opportunity for investors. Their income has grown rapidly and it won’t stop anytime soon. The demand for their products continues to grow and they are launching a new product to expand their product line. InMode’s economic divide is quite robust, and it will be for the foreseeable future. Their measures of profitability are exceptional at this point. The Omicron variant and interest rate hikes can rock the stock market for a while, but a solid company like InMode should fare fine. As Sir John Templeton put it: “The investor must seize the opportunity at maximum pessimism point and uncertainty. ”I expect InMode’s inventory to more than double.


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