InMode Stock Could Potentially Double (NASDAQ:INMD)

Investment Thesis

InMode (NASDAQ:INMD) is a leading global provider of non-invasive surgical machines. Their revenue has grown at an amazing pace in the past several years (73%, 5 year average), and they are an extremely profitable company (net income margin at 46%). Due to the recent scare from the Omicron variant, Federal Reserve’s interest rate hikes, and anticipation of a sluggish market, growth stocks have taken a hit. This has created opportunities for investors. InMode is certainly one of them. I believe InMode presents a great opportunity for an investor because:

1. Their revenue and earnings have been growing at an amazing pace, and the trend will last into the foreseeable future. The demand for their products just keeps growing.
2. They are well protected by an economic moat, as shown by their off-the-chart profitability. The distance between InMode and the next best competitor is enormous.
3. Their balance sheet is loaded with cash ($387 M) with negligible debt ($3 M). The strong balance sheet will support their growth plan even during tough times.

Revenue growth and ever growing demand

The revenue and earnings growth shown by InMode over the past several years are just amazing. It looks like an airplane leaving the runway. Using a 5 year average, the revenue has grown to the tune of 73%. Earnings growth is tracking nicely (the average percentage growth of EPS is 600% over the past 5 years, due to its small denominator). These trends are shown below.

Source: Investor relations

This revenue and profit growth won’t stop anytime soon. At the last earnings call, the executives mentioned that attendance at their workshops are at an all time high, and their international expansion plan is following projections. Also, InMode has an impressive pipeline of products in development and is launching new products to increase their reach. A couple of months ago, they announced the launch of the EvolveX platform to provide a hands-free, zero downtime full body transforming solution.

Additionally, their sales are not severely impacted by the supply chain disruption. Utilizing their various distributor and supply network they established during the pandemic, InMode is successfully managing component shortages. Therefore, I expect their impressive growth trajectory won’t stop anytime soon.

Economic moat and exceptional profitability

InMode is one of those companies that have managed to create a substantial economic moat around themselves, and the gap between InMode and the next competitor (e.g. Cynosure, CONMED, and etc) is pretty large at this point. Given their technological superiority and the patent protections on their technology, I expect they should be able to maintain this economic moat for the foreseeable future. Also, the switching cost of an already installed base (over 10,000 at this point) is substantial, so that also will help them maintain market share.

This strong economic moat in a lucrative field translates nicely into profitability. Across the board (Gross Profit Margin, EBIT Margin, and Net Income Margin), the profitability metrics of InMode are off the chart. Gross Profit Margin (86.31%), EBIT Margin (46.17%), and Net Income Margin (46.08%) are several times higher than the sector median. The significance of each margin can be found in this article. The profitability metrics compared against the sector median is shown below.

Source: Seeking Alpha

Strong Balance Sheet

The financial strength of InMode is great as well, which is not really surprising given their profit margins and ability to generate cash. The cash from operations increased from $3.0 M in 2016 to $163.6 M in 2021, and it’s nicely following the pace of revenue growth. Thanks to this cash generating ability, InMode has over $380 M of cash on their balance sheet with negligible debt. Not surprisingly, their liquidity is high with current ratio of 8.17x and quick ratio of 7.81x.

Given this strong balance sheet and high liquidity, their expansion plan will be adequately supported. Their profitability and balance sheet won’t be affected by the interest rate hike, because they have negligible debt. Also, thanks to their high cash generating ability, they won’t really need to incur much debt to sustain growth. Their international expansion plant shouldn’t be affected even by tough times. InMode’s current footprint and their international opportunities are summarized below.

Source: Investor relations

Intrinsic Value Estimation

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

The estimation revealed that the intrinsic value of InMode is almost double the current stock price. The recent drop caused by the Omicron variant and Federal Reserve’s interest rate hike has created opportunities for investors, and InMode is certainly one of them. I believe InMode stock price will rebound nicely after going through some volatility over the next couple of months.

	Price Target	Upside
Base Case	$103.54	91%
Bullish Case	$113.96	111%
Very Bullish Case	$121.38	124%

The assumptions and data used for the price target estimation are summarized below:

• WACC: 7.5%
• EBITDA Growth Rate: 45% (Base Case), 48% (Bullish Case), 50% (Very Bullish Case)
• Current Operating Cash Flow: $163 M
• Current Stock Price: $54.13 (01/07/2022)
• Tax rate: 30%

Risk

The recent surge of the Omicron variant is putting pressure on the economy and causing issues with labor shortages. Combined with the Federal Reserve’s interest rate hike, the stock market is going through a rough patch (especially true for a growth oriented stock like InMode). However, I believe the labor shortage, supply chain issue, and inflation pressure will subdue by the end of 2022, and the overall stock market will perform well after going through volatility in the first several months of the year. Even with the rate hikes, the interest rate is historically low, which favors the stock market. I don’t expect the bond yield to reverse back too much beyond its pre-pandemic level (~3-3.5% for 30 year treasury rate). The 30 year Treasury rate trend is shown below.

Conclusion

InMode presents a great opportunity for investors. Their revenue has been growing rapidly, and it won’t stop anytime soon. The demand for their products is ever growing, and they are releasing a new product to bulk up their product line. InMode’s economic moat is quite robust, and this will be the case for the foreseeable future. Their profitability metrics are outstanding at this point. The Omicron variant and interest rate hikes may rock the stock market for a while, but a strong company like InMode should come through with no trouble. As Sir John Templeton said, “The investor should grab the opportunity at the point of maximum pessimism and uncertainty.” I expect InMode stock to more than double.