The stock of aesthetic surgical company InMode (INMD) has fallen 66% from its high, underperforming the broader market over the past year. Investors are scratching their heads and wondering whether the market knows better or if there's a colossal misunderstanding here.

Bear markets often mean relentless selling, and Wall Street doesn't always get it right. The numbers show that InMode is more than just fine -- and the stock could be a market beater when growth stocks come back into favor with investors. 

Do you want profits? InMode has them.

Picking winning stocks was almost too easy in 2021, when virtually every stock was soaring. But that gets snuffed out in a bear market. Some low-quality stocks will never see their highs again.

InMode doesn't look like one of them. The company designs and sells specialty equipment for aesthetic surgery. It uses lasers and radio frequencies to remove hair or shape portions of the body non-invasively.

It certainly isn't the only medical equipment stock out there, but it does have some unique advantages. For starters, InMode is based in Israel, which gives it a tax advantage over many other companies. Management projects that its corporate tax rate will average 7.5% to 10%; for comparison, the average tax rate in the United States is 21%. And InMode has strategically outsourced its manufacturing to factories in lower-cost areas.

INMD Gross Profit Margin Chart

INMD gross profit margin. Data by YCharts. TTM = trailing 12 months.

The results are software-like 84% gross margins and a business that turns $0.40 of every revenue dollar into free cash flow. InMode is a very profitable business that will only build cash for continued growth investments or shareholder returns like share repurchases and dividends.

A solid long-term growth outlook

Aesthetic surgery falls squarely into a patient's discretionary spending -- nobody gets life-saving hair removal. This means that InMode's business could be susceptible to a recession, and you're seeing it. Revenue growth dipped following a spike last year when consumer sentiment was much higher.

INMD Revenue (Quarterly YoY Growth) Chart

INMD revenue (quarterly YoY growth). Data by YCharts. YOY = year over year.

Analysts are looking for revenue growth ranging from 15% to 25% annually over the next few years, so while InMode is not a barn burner, its growth days aren't over. Instead, they could last a while longer. The company estimates that its addressable market comprises roughly 200,000 surgically trained physicians worldwide. Currently, it has an installed-device base of about 15,480 units across 80 countries.

It seems reasonable that InMode can gradually increase its installed base over time. More importantly, that base will produce recurring revenue from the machines' disposable parts and maintenance and repairs. This recurring revenue only makes up about 12% of the business today, so that's a transition that long-term investors should follow over the coming years.

Stuck in the bargain basement

Valuations of good companies can hit jaw-dropping levels when the market gets silly. InMode now trades at a price-to-earnings ratio (P/E) of 15, which seems like a bargain for a business that analysts believe can grow earnings per share (EPS) over the next few years at a mid-teens rate. For example, Coca-Cola trades at a P/E of 26 but has slower revenue growth, lower gross margins, and slower expected growth. How does that make sense?

INMD PE Ratio Chart

INMD PE ratio. Data by YCharts.

Long-term investors have the perk of being able to capitalize when the markets do weird things. InMode got caught up in the broad selling of growth stocks, but this growing, profitable, and cheap stock could easily be a strong rebound candidate when growth stocks come back into style. Until then, ignore the noise and focus on the facts: InMode seems like a fat home-run pitch.

Related Articles

Wall Street's Making Big Calls on These 2 Dow Stocks

Why Meta Platforms Stock Popped This Week