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Thesis on Investment:
Growth stocks have had a difficult time so far in 2022. Inflation is at a 40-year high and, suddenly, two expected rate increases in 2022 have become four. Wall Street is re-evaluating the values of future cash flows, and this is terrible news for many stocks. InMode (INMD) is unlike many other growth stocks discussed below.
What Does InMode Do?
First, the basics. InMode develops, manufactures, and sells medical technologies used to provide minimally invasive procedures. Many of these methods are makeup such as skin hardening, body contouring, and hair removal. InMode fills the treatment gap between laser procedures and full cosmetic surgery. The beauty of InMode treatments is that they are office -based, minimally invasive, and do not require anesthesia. This means an expanded market demographic.
InMode stock has fainted since late 2021 and is now trading approximately 50% lower than its 52-week high.
Growth Stocks
InMode isn’t the only “growth” stock to strike in the last few months. Favorites like Palantir (PLTR), CrowdStrike (CRWD), and The Trade Desk (TTD) are also low. In fact, it looks like many fan favorites are riding the same roller-coaster, as shown below. It’s not uncommon for growth stocks to experience sharp rises and falls, something long -term investors know. But one of these stocks is not like the other.
It appears clear from the chart above that InMode is grouped with other names that have little in common.
So, what do we know about growth stocks that investors put aside? First, they are not profitable on GAAP. They are valued in price-to-sales (P/S) ratios rather than price-to-earnings (P/E) ratios. These are valued based on the potential for future cash flows and the promise that someday they will be measured in massive profits. Software-as-a-service (SaaS) stocks have their own fancy metrics to prove their mettle, such as the Magic Number and Rule of 40. They often use mountains of stock-based compensation (SBC) to maintain the positive money from operations (CFO) as they grow.
Investors love to argue which one day is the next big thing. And for a good reason. Those who choose the next ServiceNow (NOW) can make huge successes.
As shown above, if one had the foresight to invest $ 10,000 in ServiceNow stock ten years ago, they would have over $ 233,000 today.
Growth
One thing they each have is growth. 2020 was a weak year for InMode growth due to the pandemic. However, it roars into 2021. The updated guidance released recently calls for $ 357 million in total sales in fiscal 2021, up 73% in 2020.
Data from Alpha Search. Author’s chart.
Profitability
InMode not only earns GAAP; this is high profitable. Its gross margin for the first nine months of 2021 is more than 85%, better than the SaaS companies mentioned above. Palantir, for example, had a very good gross margin of 77% in the first nine months of 2021. This is one reason why some investors are confident that it can grow in profits.
InMode’s operating margin was impressive at 46% for the first nine months of 2021. It’s a dominant blow that separates it from the fast-growing but not as profitable companies in this article and really shows where it throws market the baby. the water in the bath. InMode’s net margin after tax during this period was 45%.
Organic cash flow
Due to the incredible margins, InMode generates very good cash flow. Over twelve months (TTM), the company posted $ 163.6 million to the CFO on just $ 148.4 million in net revenue, which means that for every dollar of revenue, InMode generates $ 1.10 in cash.
The company has spent a total of $ 12 million on SBC over the past 12 months, evidence that cash flows are organic and that the company is more shareholder-friendly than others. Palantir, for example, spent $ 853.1 million on SBC on TTMs. SBC is not always negative, as I discussed here in the Palantir case, and different companies have different scenarios. However, this is another point of difference between InMode and other growth companies, which looks similar to the trade -off.
Balance of the fort
The flow of money leads to a balance built like a fortress. In the last report, InMode posted $ 387.4 million in cash and short-term investments. This now accounts for a whopping 9.2% of the total current market cap which is in cash and equivalents and short -term investments. This equates to a massive shareholder value. Consequently, it is important to value the stock based on enterprise value ratios rather than just P/E. The value of the business takes into account the cash in hand of the company and long-term debt. InMode is currently trading in a forward EV with an EBITDA ratio of just over 22 and a forward P/E of 31. This is pretty reasonable for a company to grow at the rate of InMode.
Risks
InMode is risk -free. The technology is now without significant competition, but this could change at some point. As InMode says in its 10-K:
We expect that any competitive advantage we may enjoy from our current and future innovations may diminish over time, as companies successfully respond to ours, or create their own innovations.
The company also does not generate much recurring revenue. Most are made from the sale of machines, not from parts or service. This can increase over time; however, it does not appear that this will be a “razor and blades” business model. As a result, the market may one day become saturated, and the company must rely on producing new and improved models.
INMD Stock is Large Undervalued
InMode is currently trading in the same cycle as many of the top growth names. However, the company has little in common with most of them. InMode is GAAP profitable and has a huge GAAP margin. The company makes very good cash flow and has a very impressive balance. The stock is not risk -free, however. The business model has weaknesses, and the market can continue to integrate InMode with pure developments despite the irrationality. For those who want to accumulate shares, incremental buying may be the best strategy in the current market.