INMD Stock analysis via /r/wallstreetbets #stocks #wallstreetbets #investing

INMD Stock analysis

I believe INMD is the greatest value, for its growth prospects I see on the market today. Although I'm just a college kid that has a propensity to lose money in growth stocks. Also, I didn't include numbers you can easily find on their quarterly report cuz I don't want to wast my time lol.

TLDR; INMD produces cosmetic surgery devices and has developed a strong moat from selling hand pieces at low S&M spending. Also, they have development a moat by creating very high switching costs (high training costs and legal risks if you switch to a competitor). They have extremely high margins, ROA, ROE and growth, all while trading at a very fair pe.

Full analysis:

InMode produces aesthetic surgery devices mainly dealing with the minimally-invasive and non-invasive segments. They sell devices to plastic surgery clinics to complete treatments including hair removal, face/body contouring and anti-aging along with other treatments. InMode sells the main work stations, hand pieces that attach to the workstation and consumables.

I believe InMode has developed an extremely wide moat which has allowed them to constantly grow revenue, profits and keep S&M cost low. One way InMode has developed a moat is through high switching cost. Once InMode has sold their product to a customer the training costs to switch to other companies' devices is massive. Also, switching devices poses great risks because if plastic surgeons are not as familiar with the new devices, it could lead to botched surgeries which could be extremely costly to a clinic and tarnish their reputation. The practice would likely be better off sticking with their current device instead of potentially taking on the risk of messing up surgeries and taking on training expenses. 

The second way InMode has expanded their moat is by creating a kind of distribution network. When InMode gets one of their workstations into a medical practice they can offer that medical practice hand pieces that complete different treatments at substantial discounts compared to if they bought a new workstation with a handpiece from another company. This allows InMode to almost generate recurring revenue. Also, as they develop more technology and handpieces they will have a network to sell these new technologies with very little S&M expense. This can already be seen in their extension of their profit margin from 40% to 47.5% (mrq) year over year. Plus, InMode has achieved a ROA of ~25% and a ROE of ~48% which are very strong indicators of the moat I’ve identified. 

What’s the market missing? There’s not a ton of analysts covering InMode but from the few reports, the main concerns the market has are high competition, particularly vulnerable during an economic downturn and they don’t have a sustainable source of recurring revenue. I believe InMode will be able to ward off competition because of their moat and the aesthetic medical device market as a whole is projected to grow at a 11-13% CAGR so InMode doesn’t need to take too much market share. It’s true that InMode would struggle in an economic downturn just as they did when Covid turned the economy upside down; seeing a 33% decrease in revenue from q4 2019 to q2 2020. Despite this Inmode was able to maintain a 21% profit margin so their business was never in any longer term turmoil. In addition to this InMode has built up very strong cash positions with very little debt so they are well positioned if they needed to weather a downturn in the economy. Also, I believe their business is set up so this decrease in revenue will cause a future build up in demand. Lastly, analysts are seeing relatively low service/consumables revenue (10% of revenue) compared to capital equipment revenue (90% of revenue) and jumping to conclusions that this means InMode doesn’t have strong recurring revenue. There's three things to consider here; number one service revenues are defined as “repairs and extended warranties” so if this revenue is lower it should not be seen as a negative because their machines do not need repairs as often. Secondly, service revenue is inevitably going to increase as more workstations get sold and age. Thirdly, they don’t consider the development and sale of new handpieces as recurring revenue.

InMode’s TTM operating margin is ~46% and the question is whether they can maintain this or how close to a maintain can they come. Market consensus is that operating margin will fall to ~38% by 2023. InModes gross margins have been consistent around the 85% mark for the past few years and both I and the market expect this to remain consistent. Also, the street and I project out R&D very similarly and have InMode as a track record of keeping R&D spending as a percentage of revenue in the 3-5% range while still producing new products. Where I stray from the market is lower projected S&M spending as a percent of revenue. The street projects this out to ~41% of revenue whereas I believe because of the moat InMode has built they will be able to keep this number in the 34-36% range. Because of my lower projected S&M spending I believe InMode will maintain a ~44% operating margin. Also, because of their moat and strong industry growth projections I believe InMode will be able to achieve a 25-30% CAGR over a 10 year period. InMode also currently trades at a very low pe of 21x MRQ earnings annualized or 29x TTM earnings (I am aware that this is not that cheap but considering the current market prices and their growth I feel I have the right to consider its pe "very low"). With a 12x EBIT exist multiple I believe InMode will return 6.5x in a bull case, 5x in a base case and a 3.5x in a bear case over 10 years.

Edit: I’m in at $49.5/share. Currently it accounts for 20% of my portfolio.

Submitted January 15, 2022 at 12:17AM by NikTebow
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