Trading On margin

InMode: Alpha Long-Term Growth – Playing the Insurance Game Next


Investment thesis

InMode Ltd. (NASDAQ: INMD) remains well positioned for growth, given its stellar margins and excellent grip on inflationary issues so far. As the company continues to aggressively expand globally, we expect an upward reassessment of its revenue and profitability. growth, potentially triggering long-term stock price appreciation.

In the meantime, we expect INMD to expand its medical device offerings as well, with the potential benefit of insurance reimbursement in the future. The move would help drive widespread consumer adoption regardless of inflation and recession issues, taking the company beyond its current aesthetic applications. This will speculatively boost the valuations of INMD’s shares in the future.

InMode could potentially enter the insurance game

With the recent approval of INMD’s EmpowerRF device for women’s health and well-being by Health Canada in June 2022 and the United States FDA in August 2021, the company could expand further in the field of well-being. -to be medical, beyond the usual aesthetic applications. The device has received regulatory approval to improve symptoms of urinary incontinence, as well as genitourinary syndrome of menopause, chronic pelvic pain and blood circulation. Although the INMD device is not currently covered by insurance, there is a real possibility that this technology could be adopted by several insurers in the future, assuming sufficient demand for said service and eventual proven results. .

At this time, ELITONE is the only non-vaginal stimulation device covered by prescription insurance, proven to successfully treat stress urinary incontinence in women. The treatment method used by ELITONE has a similar result to INMD’s EmpowerRF with Vtone attachment. Both products rehabilitate the pelvic floor muscles to reduce urinary leakage from now on. Assuming the INMD device is eventually approved for insurance reimbursement, we can expect to see more widespread demand in the future, given that the global market for urinary incontinence devices is expected to grow. from $2.09 billion in 2020 to $6.17 billion by 2030, at a CAGR of 11.8%.

This move would eventually boost INMD’s revenue and profitability growth, as it would open more doors to research, development and non-invasive medical procedures, instead of elective aesthetic applications. The company’s recent expansion into women’s health and wellness is already seeing significant growth, with updated guidance of $30 million in revenue by the end of fiscal 2022, instead of from the original estimate of $20 million. It will then represent a good 6.9% of its total revenue, with high potential for multiple expansions in the future.

Therefore, it made sense that INMD would also explore several non-invasive pipelines, including medical treatments for gynecology, ophthalmology, ENT issues and others. This strategy would protect INMD’s profit margins and stock prices during rising inflationary pressures, due to potential therapeutic appeal with little downtime compared to surgeries. Nonetheless, as this is speculation at best, it remains to be seen whether INMD stock is able to sustain its current rally, due to a pessimistic stock market and potential recession. We will see.

INMD continues to deliver impressive margins despite temporary headwinds

INMD Revenues, Net Income, Net Income Margin and Gross Margin

S&P Capital IQ

INMD has definitely benefited from the pace of reopening so far, with the strong pent-up demand for medical and cosmetic procedures. In the second quarter of 2022, the company reported revenues of $113.55 million and gross margins of 83.3%, representing an exemplary increase of 30% but a notable decline of 2.1 percentage points in year-on-year, respectively. Revenue comprised 87% of equipment sales and 13% of consumables, the latter representing exceptional year-on-year growth due to the expansion of the installed base.

Meanwhile, INMD reported net revenues of $44.05M and net revenue margins of 38.8% in the second quarter of 2022, representing an increase of 4.7% but another decline of 8.1 percentage points year-on-year, respectively. The company’s declining margins are primarily attributed to rising inflation, which continues to drive up manufacturing, labor, transportation and logistics costs for most industries. Therefore, its current exemplary margins highlight INMD’s supply chain prowess so far as the issue naturally affects many global companies.

INMD Operating Expenditures

S&P Capital IQ

On the other hand, INMD continued to invest in its operations, with total operating expenses of $45.39M in Q2 22, representing an increase of 25.5% QoQ and 37 .2% YoY. Still, it’s critical to note that its growing revenue ratio has remained flat so far, accounting for 40% of the company’s revenue in the second quarter of 2022, relatively in line with historical levels.

Cash/equivalents INMD, FCF and FCF margins

S&P Capital IQ

Therefore, given its improved profitability and moderate expenses, we are not surprised by INMD’s strong free cash flow (FCF) generation so far, with an FCF of $46.42 million. and an FCF margin of 40.9% in the second quarter of 2022. While these numbers represent a notable year-over-year decline in FCF margins, we are not overly concerned as rising inflation is a headwind at best. temporary. Additionally, INMD continues to report a growing war chest of $88.4 million in cash and cash equivalents on its balance sheet by FQ2’22, despite the massive share buyback in FQ1’22.

INMD Net PPE and Capex

S&P Capital IQ

The main reason why INMD continues to show impressive gross, net and FCF margins so far is that it mainly outsources all of its manufacturing needs while maintaining the necessary quality controls. This allows the company to maintain minimal inventory levels without having to incur large capital expenditures for manufacturing and warehousing needs. Therefore, this strategic plan will allow INMD to report minimum net assets of property, plant and equipment of $6.98 million in the second quarter of 2022, which represents only 1.3% of the company’s total assets. of $523.21 million, while reporting capital expenditures of $0.56 million at the same time.

INMD Diluted Shares Outstanding and Stock-Based Compensation

S&P Capital IQ

Over time, we have unfortunately observed a noticeable increase in INMD’s stock-based compensation (SBC) expenses with a total of $6.35 million reported by FQ2’22. This represents a sudden increase of 205.5% QoQ and 215.2% YoY. Nevertheless, investors have nothing to worry about, as the company has also kept its share count relatively stable so far, with a total of 84.66 million reported as of FQ2’22. It indicates a minimum share dilution of 11.2% since its IPO in 2019, helped by multiple share buyback programs so far. Notably, for 1 million shares announced in March 2022, which had reduced its number of shares by 1.2% by FQ2’22.

We will likely see an upward reassessment of its future revenue and profitability

INMD Revenues and Projected Net Revenues

S&P Capital IQ

Over the next three years, INMD is expected to report a notable deceleration in revenue and net income growth at a CAGR of 15.01% and 11.39%, respectively, from its historical 5-year CAGR of 72.99% and 244.50%. It is evident that the company’s net profit margins will also normalize over time, rising from 46.1% in fiscal year 2021 to an expected 41.9% in fiscal year 2024. Nonetheless, we are encouraged as this still represents a notable improvement from its previous net profit margins of 39.1% in fiscal 2019.

Assuming continued growth of INMD’s international base, we expect to see an upward reassessment of its revenues and profitability in the future. By FQ2’22, the company reports a 33% year-on-year increase in global sales (outside the US), accounting for 36% of revenue. Therefore, assuming successful penetrations into major cosmetic markets such as China, Korea and Brazil, a more optimistic revenue growth projection of 22% is very likely by FY2024. ‘INMD remains well positioned for post-reopening growth pace, as the global non-invasive aesthetics market is expected to grow from $53.8 billion in 2021 to $190.5 billion in 2030, at a CAGR of 15 .2%.

For fiscal year 2022, INMD guided revenue between $425M and $435M and EPS between $2.11 and $2.16, compared to consensus revenue estimates of $432M and EPS of 2 $.16. This would represent excellent annual growth of 20.96% and 5.2%, respectively. Thereby, potentially pushing for long-term stock price appreciation due to its stellar margins and upcoming execution.

So, is INMD Stock a buySell ​​or Keep?

INMD 5Y EV/Revenues and P/E Ratings

INMD 5Y EV/Revenues and P/E Ratings

S&P Capital IQ

INMD is currently trading at a Revenue EV/NTM of 4.95x and P/E NTM of 14.84x, below its 5-year average of 7.67x and 25.25x, respectively. The stock is also trading at $34.33, down 65.4% from its 52-week high of $99.27, but with a 66.6% premium to the 52-week low. weeks at $20.60. It is evident that the stock has rallied 20% in the past few days following an exemplary FQ2’22 earnings call.

INMD stock price 5 years

INMD stock price over 5 years

Looking for Alpha

Therefore, despite consensus earnings estimates of $48 with an upside of 39.82%, we prefer to wait a bit for the current rally to be digested. Long-term investors considering adding this strong stock can aim for the mid-$20s for the best margin of safety, but preferably at the low-$20s for maximum gains.

Therefore, we rate the INMD stock as a Hold for now.