Let's talk about what we know about cosmetic surgery. First, it's costly. It's invasive, leaves scars, and has long recovery times. Cosmetic surgery is mostly for the rich and famous -- not regular folks, right? Well, InMode (INMD 1.40%) has a patented platform that changes the game.
InMode is the developer, manufacturer, and seller of minimally invasive platforms used primarily for cosmetic procedures and health. The stock at one point had risen over 1,000% after its initial public offering that occurred in 2019 and was up more than 180% by Q4 2021. However, the stock has fallen significantly since Nov. 1, which offers investors a compelling entry point.
InMode has several technologies that are approved and on the market. The products include the radio frequency (RF) technologies dubbed Evolve and Evoke, which utilize RF energy for face and body contouring, toning, and tightening. Other technologies are used for hair removal and health applications. The technologies are used in an office setting, not a surgical environment. There is no need for anesthesia or extensive recovery times. This keeps minimizes costs and makes the procedures available to a much broader market.
Tremendous growth and margins
Revenues have increased prolifically over the past several years. If guidance previously issued for the rest of 2021 holds, the company will have posted another 68% increase over 2020, as shown on the chart below. The pandemic constricted 2020 revenue, yet InMode still grew 32%. Its compound annual growth rate since 2017 is over 59%.
Even better, the company is highly profitable while it's growing. In fact, InMode's profitability puts most companies, even highly successful ones, to shame. When comparing InMode's margins to heavyweights Apple (AAPL 1.56%), Microsoft (MSFT 1.50%), and Nvidia (NVDA 1.44%), InMode comes out on top in profit margin and operating margin, and nearly in earnings before interest, taxes, depreciation, and amortization (EBITDA).
InMode has a net profit margin and operating margin of over 45%, which is incredible. Microsoft is the winner in EBITDA margin. However, InMode makes a strong showing, especially for a product-based company. The comparison to these high-flying companies outside of the healthcare field shows the tremendous profitability metrics being posted by InMode across sectors.
Cash flow for a pristine balance sheet
InMode generates a tremendous amount of cash flow because of its incredible margins. Over the first three quarters of 2021, the company generated $1.09 in cash from operations for every dollar of net income produced. Because of this, the company has no long-term debt and keeps a significant amount of cash on hand; it also has short-term and long-term investments. These investments produce interest revenue, which will increase as rates rise. While most companies pay interest, InMode is receiving interest. This also allows for a small built-in inflation hedge for investors. InMode had more than 5% of its market cap on hand in cash and investments as of its last quarterly report.
Is the valuation too high?
InMode has decidedly high valuation metrics, as one would expect given the numbers above; however, the valuation has come down significantly from its peak. It is essential to view the metrics in terms of enterprise value (EV) rather than market cap due to the company's immaculate balance sheet. For instance, InMode's forward P/E ratio is 37. Although, the forward EV-to-EBITDA ratio is only 30, and the EBITDA and net profit margins are nearly identical. Considering the growth rates and massive market opportunities, this stock still has room to reward investors handsomely.
There is a danger that new entrants could take market share from InMode. According to the company's recent investor presentation, its products are patent protected, but InMode holds just seven patents, with 14 pending. Many healthcare companies are able to protect their products with hundreds of patents. The company acknowledges this danger in its annual filing, noting, "We expect that any competitive advantage we may enjoy from our current and future innovations may diminish over time, as companies successfully respond to our, or create their own, innovations."
InMode also makes nearly all of its money from the sales of machines. This means that most revenue is nonrecurring. As more devices enter the market, it will be critical to expand internationally and develop more advanced product versions over time to sustain its growth rate.
The pullback is a buying opportunity
InMode provides a solution for people who are not willing or able to have traditional cosmetic procedures but still have problem areas they would like to address. The opportunity for growth here is tremendous. The company has posted enormous growth already and backed it with outstanding margins and profits. Its balance sheet is exceptional. InMode's valuation is high; but, this is understandable. After the recent pullback from all-time highs, the stock could be ripe for the picking for long-term investors.