InMode: Prettier Again

Jun. 27, 2022 12:25 PM ETInMode Ltd. (INMD)10 Comments7 Likes

Summary

  • InMode has generally been a great success story since its public offering.
  • After a huge boom in 2021 and subsequent bust, valuations look very compelling again.
  • While some concerns remain, the overall valuation argument prevails here.
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When InMode (NASDAQ:INMD) went public in the summer of 2019, it immediately drew my attention. In fact, when the company went public, I wrote an article in which I wondered if this was a beautiful IPO or not, seeing the potential for a multi-bagger, albeit with some hurdles to overcome, and quite some to prove.

A Recap

InMode provides so-called minimally invasive surgery aesthetics and medical treatment solutions, all based on "energy". RF energy and technology penetrates in sub-dermal fat allowing for tissue remodeling, claiming to deliver on surgical results without the costs, pain and complications of surgical solutions.

The company went public at $14 per share, and with a substantial net cash position, operating assets were valued at just over $300 million at that level. That stroke me as a low valuation for a business which doubled sales to $100 million in 2018 on which it posted very strong adjusted earnings of $30 million, operating earnings those are.

With revenues trending at $160 million per annum at the time of the IPO and margins being strong, I wondered why this was not a $40-$60 stock unless there was something wrong with the business or product, hard to judge for an outsider.

Shares initially rallied to the $25 mark but fell back to $10 amidst the outbreak of the pandemic, as this solution was far from a lifesaver, of course, not a priority at the time. Ever since the shares rallied, and they actually hit the $100 mark, if not for a couple of pennies in the autumn of 2021, to now settle at just $25. So what happened?

Late 2020

I pick up the story late in 2020 again, as I concluded that shares offered beauty in the eye of the beholder. Originally guiding for sales of nearly $200 million in 2020, with operating margins of around 40%, these projections could be thrown out of the window soon given the arrival of the pandemic.

With first and second quarter sales hampered in a big way, third quarter revenues actually were reported at $60 million, very comforting as it is hard to see how much catch-up demand was in there. In the end, the company was set to meet and actually surpass the original guidance for the year, despite the pandemic. Pegging earnings power at just over $2 per share, while net cash stood close to $5 per share, valuations were quite attractive to me at $40, with an unleveraged business trading at 17-18 times earnings.

Early in 2021, it turned out that full year sales for 2020 came in at $206 million as the company issued a comforting $250-$260 million revenue outlook for 2021. This guidance was hiked to more than $300 million following the second quarter earnings release, triggering a continued rally in the stock throughout the year.

Given this momentum, the company announced a two-for-one stock split later that autumn, as the $100 peak mentioned above not soon thereafter really is a $200 valuation if we go back to IPO day (so adjusted for the stock split).

Momentum was very strong as revenues did rise 73% in 2021 to $358 million, more than a hundred million ahead of the original guidance. GAAP earnings of $165 million worked down to numbers just shy of $2 per share, really corresponding to a $4 per share number ahead of the split.

With 86 million shares peaking at $100, the valuation rose to $8.6 billion, although this includes a net cash balance of just over $400 million. Needless to say, valuations became demanding with operating assets trading near the $100 mark, with earnings power set at just over $2 per share on a forward-looking basis. Furthermore, the best of the momentum appeared a thing of the past, with the company guiding for sales at a midpoint of $420 million, albeit that a conservative guidance practice has rapidly been established.

What Now?

Note that the reversal from a peak valuation of $100 per share happened quickly as shares traded around the $50 mark early in 2022 already and ever since have ever come down, now trading at $24 per share. The board took advantage of this by announcing a 1 million share buyback program in March, quite a limited program if you ask me given the move in the share price and the net cash balances held by the firm.

First quarter results were announced soon thereafter, and a 31% increase in sales to $86 million is quite solid, with GAAP earnings of $31 million translating into a five-cent increase in earnings per share to $0.36 per share. The company maintained the full year guidance with earnings seen just north of $2 per share. Net cash balances of $400 million are equal to nearly $5 per share here, and with the same shares trading at $25, this implies that unleveraged operating assets trade at just 10 times earnings here.

While the best momentum appears behind us, the overall valuation is cheap enough to leave me puzzled again, and in fact, left me buying again as these levels are certainly interesting enough to be involved with the stock again. At the same time, I am a bit cautious to make the position too large as concerns about saturation and effectiveness of the production in a competitive market continue to surface at various points in time, as a recession, of course, could hurt short-term demand as well.

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This article was written by

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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.
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Disclosure: I/we have a beneficial long position in the shares of INMD either through stock ownership, options, or other derivatives. 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.

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