There are few things as sweet as a 10-bagger stock that you've watched grow and grow. Investors only need a couple of home runs to make up for the lemons in their portfolio, and that's why it's crucial to find stocks that have a shot to 10X.
With growth of 267.4% in the last three years alone, the medical aesthetics company InMode (INMD -0.06%) is already well on the trajectory of being a 10-bagger. For InMode to grow by 10X, its market cap would need to expand from where it is now at around $2 billion to reach $21 billion by the middle of 2032. Let's examine the company's business model and its recent financial performance to get a feel for whether that's a realistic goal or a pipe dream.
Image source: Getty Images.
Here's how fast it would need to grow
InMode is a technology-intensive company that makes workstations for medical aesthetics purposes like reducing fat deposits, toning muscles, and tightening skin. It also sells traditional aesthetic hardware like laser-based hair ablation devices. The devices are sold to aesthetic surgeons and doctors, who then market treatments to patients.
InMode's niche is treatments that are less invasive than plastic surgery but still provide similarly potent results. The idea is that its devices will steal market share from both traditional noninvasive medical aesthetics segments like laser treatments as well as invasive segments like plastic surgery. InMode says that its radiofrequency (RF) technology is what enables its treatments to be minimally invasive outpatient procedures without the need for general anesthesia.
Its net income in 2021 was around $164.9 million, but three years ago it was only roughly $22.3 million. That means it had a compound annual growth rate of more than 87.4% between 2018 and 2021, which probably isn't sustainable for the next decade even with its technology. According to its latest earnings report, its quarterly net income grew by 16.3% year over year, which is likely slower than its future growth, as management stated that the company is facing temporary supply chain issues that are depressing its margin. But, its revenue rose by 31% year-over-year in the first quarter, reaching $85.9 million, so the supply chain issues don't appear to be impacting its ability to deploy new systems.
With such ongoing growth, the stock's sharp decline of more than 44.7% in the last 12 months is puzzling. The most likely culprit is the Federal Reserve's decision to hike interest rates to control inflation, which has led to significant damage among growth stocks like InMode. Regardless, if it can grow its annual earnings at a rate of 27% per year -- on the faster side, but hardly blazingly fast compared to its actual performance in recent years -- it'll reach a market cap of more than $21.2 billion by 2032.
It's not unlikely
If you're skeptical of InMode's ability to maintain that pace of growth for a decade, you're a smarter investor than many. It could still happen, but the chance that a competitor creates a better set of devices is significant, and it would hurt margins, potentially permanently. The good news is that there's another way for the company to 10X without growing nearly as quickly: A recovery in its valuation.
The calculations above are only valid at InMode's current valuation, wherein its trailing price-to-earnings (P/E) ratio is around 11.8. At the moment, the market's average P/E is near 20.7, and the medical device industry's average P/E is more than 46.6. As recently as September of last year, before the onset of the bear market and the Federal Reserve hiking interest rates, the company's shares were trading at a P/E of more than 53, and nothing has changed about its business model, financial performance, or its ability to execute it since that period. Of course, the market has soured on growth stocks like InMode because they won't be able to borrow money as cheaply, but that sentiment won't last forever, nor does the (profitable) company need to take out loans to grow.
If investors at large recognize that few businesses are as cheaply valued, profitable, and rapidly growing as InMode, the stock's valuation might rise again. If its P/E valuation stabilized around 25 (which still leaves it at a huge bargain relative to its industry as well as its historical levels), it would only need to grow by 18% per year to reach a market cap of more than $21.5 billion at the end of 10 years. And 18% growth per year is eminently attainable and maintainable for the long run, especially considering its performance this year so far despite headwinds.
Barring major disruption by competitors, which can't be ruled out, InMode has a very solid chance of increasing its value by 10 times over the next 10 years.
