InMode's (INMD, Financial) stock price has experienced significant volatility over the past few years. From 2020, it has seen a wide range of fluctuations, dipping to a low of $11.57 and soaring to a high of $90.71. As of this writing, the stock has settled at $21.70, which is within its 52-week low range. Such volatility presents opportunities for investors, but it also requires caution. It's important for investors to recognize and seize these opportunities without being swayed by short-term pessimism or optimism. Considering InMode's share price at its current 52-week low range, the company appears to present a promising investment opportunity for investors.
Niche business segment
InMode, an Israeli business, offers laser machinery for cosmetic medicine in three main areas: face and body contouring, medical aesthetics, and women's health. The company's solutions offer surgical-grade results with fewer risks and complications. InMode has launched multiple innovative product platforms since 2010, focusing on continuous technological advancement and market penetration. The company occupies a unique position in the aesthetic treatment industry. It stands in the middle of laser procedures and plastic surgeries. Traditional laser treatments, while being non-invasive, typically require many sessions and may offer limited results. In contrast, plastic surgeries provide more immediate and effective outcomes but involve higher costs and the potential for incisions or scars, which can deter patients. InMode's approach offers a middle ground, addressing these challenges in aesthetic procedures.
Impressive growth over time
InMode has significantly grown revenue and profits over time. From 2016 to 2022, its revenue skyrocketed from $23.1 million to $454.3 million, reflecting a compounded annual growth rate of 64.3%. This robust expansion is mirrored in its operating income, which soared nearly 300-fold from a modest $0.67 million in 2016 to nearly $198 million in 2022. Correspondingly, the company's free cash flow followed a similar upward trajectory, increasing from $2.81 million in 2016 to $180 million in 2022.
High-margin business and return on capital
InMode's niche business model has helped the company consistently generate high gross margin and operating margins. Over the past five years, the company has maintained a gross margin between 83.8% and 87.1%, while its operating margin has varied within a range of 31.4% to 46.8%. These substantial margins have yielded impressive returns on capital. In the same five-year period, InMode's return on capital has ranged from 28.4% to 67.2%. Specifically, in 2022, the company achieved a return on capital of 35.4%, with a gross margin of 83.8% and an operating margin of 43.6%. These remarkable financial performances highlight InMode's ability to generate substantial, growing profits while making the most of its capital.
Debt-free balance sheet
InMode's shareholders could sleep well with the company's conservative capital structure. The company's balance sheet is quite strong, highlighted by substantial cash and short-term investments. As of September 2023, InMode had as much as $675.85 million in cash, cash equivalents, short-term bank deposits, and marketable securities. Notably, the company operates without relying on any interest-bearing debt, solely utilizing its shareholders' equity, which stands at $723.5 million. InMode's total liabilities, including payables, contract liabilities, and operating lease obligations, amount to only $90 million.
Significantly undervalued
The discounted free cash flow model can be used to estimate InMode's intrinsic value. With a projected annual growth in free cash flow of 25% over the next five years, followed by a terminal growth rate of 1%, and a 10% discount rate, InMode's intrinsic value is estimated to be approximately $4.82 billion. However, a potential concern is the increasing number of shares over time. In the past five years, the weighted average diluted share count rose from 70 million to 85.40 million. Assuming a further 20% increase to 102.5 million shares in the next several years, the intrinsic value per share would be around $47, which is 110% higher than its current trading price of $22.35.
Source: Author's table
If InMode maintains its current share count over the next five years, the share price could potentially reach $56.4, offering 2.5x potential upside from its current trading price. This analysis underscores the potential investment value of InMode, albeit with considerations around share count changes.
Key Takeaway
Indeed, InMode presents a compelling investment opportunity for long-term investors, reflecting a unique balance of innovation, financial strength, and market positioning. The company's niche in laser machinery for cosmetic medicine has established it as a key player in the aesthetic solutions market. Financially, InMode's operating performance has been impressive, with significant revenue and profit growth. The company's high margins and strong return on capital are particularly attractive to long-term investors. Moreover, its debt-free balance sheet provides a reassuring picture of stability and resilience. Based on a discounted free cash flow model, the intrinsic value of InMode's stock appears to be at least 110% higher than its current trading price, suggesting that InMode is a good choice for investors at the moment.
