Amid the declining share prices wrought by the bear market, there are tarnished treasures to find everywhere. It's shopping season for growth investors -- provided that you're willing to buy right when everyone else is selling, of course.
In particular, InMode (INMD +2.23%) is a steeply undervalued business with the shares down 55% so far this year as a result of growth stock phobia and temporary headwinds. Over the last couple of weeks, signs of a turnaround have started to bubble to the surface, but its shares are still trading cheaply.
This company could be a great purchase if you're looking for a bargain buy that's likely to outperform the market over the next few years.
NASDAQ: INMD
Key Data Points
Recent setbacks look to be abating
The pitch for InMode is that there's a niche in the aesthetic therapies market for devices that deliver skin-tightening, muscle-toning, or fat-dissolving treatments that are more effective than laser-based methods, but less invasive than plastic surgery. To access that niche, the company makes a handful of workstations, including a few that deliver traditional laser treatments.
Each workstation has a few different devices that can deliver specific beautifying treatments to patients, meaning that physicians can purchase one unit and gain several new capabilities. And as the devices sometimes need maintenance (such as replacement parts or other services), each workstation ends up generating some recurring revenue.
So far, InMode's pitch to medical aesthetics providers seems to be well-received. Over the past three years, its trailing 12-month revenue grew by 174%, reaching nearly $378 million, whereas its net income popped by 304%. Nonetheless, it recently experienced a bump in the road when both its top and bottom lines contracted sharply compared to the prior three-month period. Management pointed to the global supply chain and shipment prices as the reasons for its contracting margins, both of which it expects to continue.
But that doesn't seem to matter much anymore, now that a few workarounds are in place. On July 12, the company gave a sneak peek into its anticipated Q2 earnings and it has opted to raise its guidance for 2022 from a high end of $425 million in revenue to a new high end of $435 million. What's more, it plans to keep growing by continuing to develop and commercialize new devices while penetrating new markets like in China, where it has a subsidiary.
The valuation looks very reasonable now
Aside from the supply chain and shipping issues, the steep descent of InMode's stock over the last year was largely caused by panic surrounding rising interest rates, which hurt many other growth stocks just as hard. As the cost of borrowing money in the U.S. is anticipated to keep rising sharply, it makes sense that the market would punish growth-stage enterprises, which are the most likely to need additional help with financing.
For now, the company isn't relying on debt to fuel its growth, however, as it has a negligible sum of just over $3 million on loan.Yet, as a result of the market fallout, InMode's shares are valued quite cheaply. Its trailing price-to-earnings (P/E) multiple is around 14, which is a bit cheaper than the market's average of 19. And compared to the medical device industry's average P/E of above 34, it looks even sweeter.
So with such a steep discount relative to its peers as well as to the market, and with plenty of new growth anticipated in the near term and beyond, it's a favorable time to buy a few shares of InMode. But be aware that the medical aesthetics industry is quite competitive, so it's plausible that competitors might try to encroach on its minimally invasive treatments turf at some point in the future, especially if it keeps gaining traction in the market as quickly as it has been.
