In 2021, it seemed as if medical technology stocks could do no wrong. Shares of cosmetic sculpting device manufacturer InMode (INMD -1.58%) more than doubled as enthusiasm for all things new and medically related reached a fever pitch.
Shares of InMode have tanked 72% since they hit an all-time high last November. High inflation, rising interest rates, and fear of a recession are putting markets under enormous pressure, and it looks as if this stock has been taken down a few pegs too far.
Reasons to buy InMode now
InMode markets minimally invasive cosmetic sculpting devices that employ a proprietary radio-frequency (RF) technology. Cosmetic skin treatment providers the world over are beating a path to InMode's doors, and this may be a larger market than most investors realize.
Botox from AbbVie (ABBV -2.10%) isn't the same as treatment with one of InMode's devices, but it's a good indicator for the overall minimally invasive cosmetic alteration space. Cosmetic Botox sales finished the first quarter on an annualized run rate of $2.6 billion.
Recently, InMode shared preliminary figures from the second quarter that show strong uptake despite a great deal of economic uncertainty. The company expects second-quarter sales to come in at around $113 million which is 30% more than the company reported in 2021 and a whopping 268% gain over the same period in 2020.
InMode sales aren't soaring because the company's giving its equipment away. This well-run company produces a strong profit. This year, adjusted income from operations is expected to come in at around $201 million, or around 48% of this year's total revenue estimate.
You might expect a strongly profitable business that will most likely double in size over the next few years to trade at a premium valuation, but it isn't. You can scoop up shares of InMode now for just 13.9 times earnings. For comparison, the average stock in the benchmark S&P 500 index trades at 20.6 times earnings.
Reasons to remain cautious
While InMode is technically a healthcare stock, sales of cosmetic sculpting devices probably aren't as resilient as sales of medical devices that Medicare, Medicaid, and private insurers regularly purchase for people whose lives depend on them. Sales of InMode's products have continued their strong upward climb in the first half of 2022, but there are no guarantees that demand will remain strong if macroeconomic conditions worsen.
InMode operates a razor-and-blades business model with skin contouring equipment that uses consumable needles that treatment centers must buy from InMode. This is a tried and true strategy, but revenue from consumables and services accounted for just 16% of total revenue in the first quarter. With capital equipment sales responsible for more than four-fifths of total revenue, InMode's cash flows might not be as predictable as cautious investors want them to be.
A buy now?
According to the Bureau of Labor Statistics, consumer prices rocketed 9.1% in June. One of the best ways to combat soaring inflation is by investing in companies with pricing power.
Options for minimally invasive skin toning and tightening services are extremely limited. With a patent-protected system only InMode can sell, this company has a level of pricing power that most others can only dream of. This advantage plus an attractive valuation make InMode a great stock to buy now and hold for the long run.