InMode (INMD +0.78%) is proof that there isn't always a trade-off between stocks with great value and those with tremendous growth potential. This medical device maker has everything you'd expect from a value stock -- a low valuation, repeatable business model, and cost-sensitive management -- and it also has the strong revenue and earnings expansion of a monster growth stock.
There's reason to believe that the company's fortunes are going to keep improving. Let's analyze how and why InMode sports these positive features but is not as richly valued as a company like Tesla.
NASDAQ: INMD
Key Data Points
Trimming the fat without breaking the bank
InMode develops medical devices that plastic and facial surgeons use to liquidate fat, remove unsightly hairs, tighten skin, and sculpt muscles. In contrast to plastic surgery techniques that aim for the same goals, the company's hardware doesn't require patients to go under anesthesia, and administering treatments is significantly less invasive.
Management claims that its collection of 28 Food and Drug Administration (FDA)-approved devices can provide outcomes for patients that are similar to plastic surgery; yet, its treatments are significantly more accessible. And that's a great sign when a business is trying to make inroads into a crowded market like medical aesthetics.
Moreover, InMode's treatments are often less expensive than plastic surgeries. But don't take that to mean the company's unit economics are unfavorable. Its profit margin -- in excess of 44% -- should be enough to make most investors' heads turn. Plus, this is still a company that's very much in its growth phase. Since Q2 in 2019, its trailing 12-month revenue grew by 206%, topping $377.9 million, and net income rose even more, soaring 393%. Continuing to scale up the company's global sales force with its profits should ensure that new sales keep flowing over time.
To top it off, InMode only has debt of just over $3 million, and its cash holdings of around $399 million mean that it can pursue growth opportunities quite aggressively by multiple paths. That could take the form of spending more on research and development (R&D) to develop new devices, for example, as its trailing 12-month expenditures only totaled a hair over $10 million. Or it could opt for acquisition-driven growth of promising, smaller device manufacturers.
The price is right
Though InMode's business model and rapid penetration of its markets make it a dead ringer for a high-flying growth stock, it's also valued quite cheaply. Its trailing price-to-earnings (P/E) ratio is around 11. That puts it at a considerable discount to the market's average P/E of about 19. And looking at the medical equipment and supplies industry's average P/E of approximately 43, the stock looks valued at an even deeper bargain.
So what's the catch? There are a couple, starting with the stock's collapse of more than 50% over the past 12 months. Some of that drop might be related to a slight deceleration in its revenue growth over the last year. Another share of the losses could be attributed to the market's dramatically declining appetite for growth stocks, prompted by the prospect of rising interest rates and quantitative tightening by the Federal Reserve. And its recently slashed price target from Wall Street analysts certainly isn't helping either.
Nonetheless, InMode is going to continue growing its fleet of devices deployed globally, and with that, it'll also start to generate more and more income from recurring sources like extended warranties, maintenance contracts, and consumable applicators for use with its devices. In the long run, its hardware might even out-compete similar solutions, like laser skin tightening products. And at its current value, it's as close to being a steal as it's going to get -- all of which is why it's my top value stock for investors to buy right now.
