Back in January, we wrote about INMD because we saw major upside potential. Since then, the stock has returned about 60% vs the S&P 500's 10% change which may have some people questioning if it's time to take profits or not. In this article, we'll be providing an update on company's future and an updated valuation to determine if it's still worth holding or not.
We recommend reading our original article which was actually posted on InMode's website as well (thanks, InMode!) for another detailed analysis on the company: A Multi-Bagger Stock In The Making: InMode Has All The Right Traits
To keep things simple, here's the intro we wrote for INMD in our previous article.
"InMode Ltd. (NASDAQ:INMD) is a provider of minimal and non-invasive radio-frequency technology. Its innovative technology strives to improve surgical procedures. These commercialized products are used by plastic surgeons, gynecologists, dermatologists, and more.
Its products are made for a variety of purposes including liposuction, permanent hair reduction, facial skin rejuvenation, wrinkle reduction, cellulite treatment, skin appearance and texture, and superficial benign vascular and pigmented lesions. InMode operates in the U.S. and internationally. It was founded in 2008 and is headquartered in Yokneam, Israel."
Now, let's get started on our analysis.
InMode recently released its Q1 2021 earnings report. Both revenue and earnings beat expectations. Q1 Non-GAAP EPS of $0.69 beat by $0.11 and revenue of $65.5M, which grew 62% year-over-year, beat expectations by $9.3M. 2021 guidance was also raised. Revenue is expected to be between $270 million to $280 million vs. $264.47M consensus, and non-GAAP diluted EPS are expected to be between $2.60 to $2.75 vs. $2.50 consensus. Despite this, the stock is down since earnings day, implying that this was priced in.
Here are some good things to note from the earnings report. International revenue is growing very quickly, from $9.6M in Q1 2020 to $21.46M in Q1 2021, or a ~124% increase year-over-year. Asia and Europe revenue increased by 273% and 63% year-over-year, respectively. As a percentage of total revenue, international revenue is now 33% compared to 24% one quarter ago and 27% for the full year 2020. This is good news because it diversifies INMD's revenue and proves that its international growth strategy is working.
Next, recurring revenue continues to grow. Recurring revenue is the "consumables and service revenues" section in the image below. Consumables and services revenue was ~$7.8M in Q1 2021 vs. ~$5.07M in Q1 2020. As a percentage of revenue, it actually dropped year-over-year from about 13% to 12%. However, it was only 10% of revenue for the full-year 2020, so, there's an improvement there. According to the most recent earnings call, INMD more than doubled the number of consumables sold in the last 4 quarters overall and more than tripled consumables sales in regards to North America. You can see the revenue by geography and category below.
Source: InMode 6-K filing May 5, 2021
In terms of strategy, InMode plans to expand out of aesthetic projects which will further diversify its business. Here's what management had to say about this in the earnings call:
We're also expanding our verticals beyond aesthetic. As our R&D pipeline include over a dozen projects for other medical areas such as gynecology, ophthalmology, ENT, urology and several others. As part of our strategy, we expect to launch 2 new platforms this year in which our advanced bipolar RF technology will provide significant quality of life improvement.
One of these platforms is called Empower, which we expect to launch in the third quarter of 2021. Empower will be the gold standard in women's health and wellness, and we are excited to announce that it has earned FDA approval for all of its applicators.
Empower will most likely be launched in Q3 2021, but INMD doesn't expect it to become an important part of its portfolio until 2022. The reasons for this are explained below by CEO & Chairman, Moshe Mizrahy:
Even if we will launch the Empower in the third quarter, which we will, sometime at the end of the third quarter or the fourth quarter, we do not expect to sell many. Because when you launch a product, you do a soft lounge and gradually, you increase the numbers of users, you want to make sure that everybody is well thinned. You want to make sure that everybody know the protocols.
We want to publish studies, continue to publish studies on the product. We want to introduce the product to luminary doctors. It's a process. It's not a consumer product. It's not file and forget. It's not something that you can put on the Internet, and then you get, I don't know, many millions of dollars of revenue. Every product that we launched in the U.S. first and then in Canada and then internationally, it's a gradual process, which we do it very carefully, to make sure that there was enough training centers, to make sure that there is enough doctors that can help other doctors to do the first treatment.
So I don't anticipate a lot of revenue coming from the Empower in the fourth quarter, if we will launch it in the third quarter. But in 2022, hopefully, it will become one of our important platforms in our portfolio.
It's good to know that INMD has 2 platforms on the way to support its growth story and isn't resting on its laurels.
Below, we'll provide an update on how INMD stacks up against its competitors. The companies we will be comparing INMD to are Venus Concept Inc. (VERO), Cutera, Inc. (CUTR), Apyx Medical Corporation (APYX), Viveve Medical, Inc. (OTC:VIVE), and Hologic, Inc. (HOLX). These are the same companies we used for the comparison in the last article except for HOLX, which we decided to put in there even though it's not as close of a competitor as the other companies.
Below, we compare each company's market cap, cash return on invested capital, return on invested capital, average 2-year ROIC, gross profit margin, operating cash flow margin, and 3-year revenue CAGR.
As you can see, INMD is highly profitable whereas its competitors are not (besides Hologic). Hologic is also highly profitable and it's a great company, however, it's a lower-growth company compared to InMode and has lower returns on capital and margins. INMD's CROIC is 39.6%, ROIC is 37.6%, average 2-year ROIC is 38.6%, gross profit margin is 85%, OCF margin is 38.4%, and has a 3-year revenue CAGR of 56.8%. All these numbers are higher than the average shown at the bottom of the chart.
Source: Author, using data from Finbox
Cash conversion cycle: Below, is each company's cash conversion cycle. CCC is made up of days inventory outstanding, days sales outstanding, and days payables outstanding. The lower the CCC, the better. As you can see, INMD has the lowest cash conversion cycle out of the group, coming in at 100 days vs. the average of 212 days.
CCC = DSO + DIO – DPO
Note: INMD's cash conversion cycle is as of 12-31-2020 since Finbox hasn't updated it yet. Nonetheless, we don't think the numbers would have changed dramatically over 1 quarter.
Source: Author, using data from Finbox
According to Investopedia, the "CCC value indicates how efficiently a company’s management is using the short-term assets and liabilities to generate and redeploy the cash and gives a peek into the company’s financial health with respect to cash management." This is why we like to use this metric in our comparisons.
Due to InMode's excellent financials, the stock continues to outperform its peers and we expect this trend to continue.
In our previous article, we compiled a list of different procedures that compete with InMode and grouped them into the following categories: Fat Loss (Non-invasive), Fat Loss (Minimally Invasive), Women's Health, Skin Tightening, and Face Lift Alternatives.
We compared the average costs and worth it ratings obtained from realself.com. RealSelf is a very popular website for cosmetic surgery/procedures reviews. This includes reviews by both doctors and patients.
We have updated the ratings and costs and indicated the difference from the last article.
Source: All five images above by author
As you can see, most of InMode's competitors have seen their ratings drop quite considerably whereas most of InMode's ratings have increased. However, as a side note, we're not exactly sure how the Votiva rating went from 92% to 100%. Thus, take that rating with a grain of salt. Nonetheless, InMode's products are still very competitive with a good mix of products that deliver great results at better prices as well as products that command a premium over comparable ones.
When we last valued INMD, we were being conservative and we clearly undervalued the stock. Now, we'll do an updated valuation and be a bit less conservative but also not overly optimistic.
To value INMD, we used the 10-year Gordon growth exit DCF template from Finbox. Here are some of the assumptions:
Tax rate: 17.5%. We used 17.5% because Israel's corporate income tax rate is 23%, but INMD management expects around a 12% tax for 2022. Since you can't defer taxes forever, we decided to use the mid-point of 17.5% for the tax rate.
Discount rate: 6.57% (calculated by simplywall.st). We'll also show how different discount rates affect the valuation.
Perpetual growth rate: 2%
Revenue and EBITDA forecast: We often use analysts as a guideline for revenue, however, analysts often underestimate INMD as you can see with the consistent revenue surprises shown below.
Source: Seeking Alpha
Therefore, we decided to use our own estimates that are slightly higher than analysts' estimates. For Dec 2021, we just took the midpoint of INMD's $270-280M guidance. After that, we assume revenue will grow by $70M per year until Dec 2025. The reason we chose $70M is because revenue is expected to grow 70M for 2021 and we think that rate is sustainable for a few years. The growth rate eventually slows down to 3% by December 2030 and 2% perpetually.
For EBITDA as a percentage of revenue, here's what we did. We took its TTM EBITDA margins of 40.7% and assumed that INMD can hold those margins steady until December 2025. After 2025, we start dropping the margins slowly as competition may start to take market share. The perpetual EBITDA margin we use is 38%.
Note: before we updated the EBITDA margins ourselves, the model automatically assumed over 42% as the perpetual margins, which would make the valuation noticeably higher. The reason we lowered them is because we don't want to be too optimistic and overshoot the valuation.
However, EBITDA margins are up trending with the exception of 2020 (likely due to COVID-19) and TTM margins are currently at all-time highs. INMD may very well be able to continue this uptrend going forward.
Capital expenditures forecast: INMD hardly spends anything on capex because it doesn't need to (a reason why we love the company). These capex as a percentage of revenue forecasts of less than half a percent are in line with historical capex spending levels and were automatically generated by Finbox.
Depreciation & amortization forecast: D&A as a percentage of revenue is forecasted by Finbox to be 0.2% perpetually.
Net working capital forecast: INMD has historically had negative net working capital. Therefore, this forecast reflects that.
With the assumptions above, the model calculates a fair value of $115.52 for INMD. As you can see below, there is also a low-range valuation of $98.33 that assumes a more conservative 7.1% discount rate and 1.5% perpetual growth rate.
In our previous article, we mentioned several things we like about the company. These things include steady revenue growth, stable profit margins, a flawless balance sheet, and being a founder-led company with high insider ownership. All these things are still true today. INMD is still growing steadily, is projecting 84-86% gross margins for 2021 (according to the conference call), which is in line with current margins, still has no debt and has high insider ownership (although to a lesser extent, see the top 3 shareholders below). It's worth noting that the insider ownership is as of 12-31-2020.
We also mentioned the risks involved with investing in INMD. These risks include competition and relatively high beta.
Since INMD is a medical tech company, it is going to have to stay on its toes to not get out done by competition. If the competition steps up its game, INMD's margins would shrink in the future. INMD has addressed this in the risk section of its annual report. However, as we stated in the last article, InMode's track record and management team are very strong. Therefore, we don't see InMode losing out to competition any time soon.
In terms of beta, the 1-year weekly beta is 1.49, meaning that it moves 49% more than the overall market. If you are uncomfortable with fairly large price swings, don't buy InMode.
We were bullish on InMode when we wrote the first article and we are still bullish now. We actually bought some more shares on this most recent dip after earnings. As mentioned before, everything that we wrote about in our previous article is still intact. INMD has a proven growth strategy and is likely to continue executing it going forward. InMode is a dominant player in its industry which shows through its very high margins, returns on invested capital, and positive ratings on RealSelf. According to our valuation, we think the stock is still undervalued and presents a great buying opportunity for investors.
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Disclosure: I am/we are long INMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.