A bad year for the stock market just keeps getting worse. The Nasdaq Composite index has collapsed by about 33% this year.  

Growth stocks across the board have been getting hit hard even though not all of them deserved a severe market beating. Cosmetic device maker InMode (INMD -1.39%) is a former high-flying growth stock that has been hammered 65.8% from the peak it reached in 2021.

Why the stock is down

In all fairness to the stock market, InMode's earnings growth lagged revenue. The company cranked up spending on sales and marketing, which in turn caused net income growth to decelerate.

Metric Q3 2021 Q3 2022 Change
Revenue $94.2 million $121.2 million 29%
Net income (GAAP) $44.7 million $48.8 million 9%
Adjusted Income (Non-GAAP) $47.9 million $56.6 million 18%

Data source: InMode. GAAP = generally accepted accounting principles. 

In addition to decelerating growth on the bottom line, the prospect of an economic slowdown caused by soaring interest rates has investors worried. With a strong and growing position in the lucrative aesthetics market, these macroeconomic concerns seem overblown.

A terrific bargain

InMode's stock price may have gotten a little too far ahead of itself in 2021, but the losses it's taken this year have been far too severe. Now, you can buy the stock for just 14.6 times management's adjusted earnings expectations for 2022.

At recent prices, the average stock in the S&P 500 trades at 16.9 times forward earnings expectations. As you will soon see, InMode has growth potential far above the average stock in the benchmark index. 

InMode markets patent-protected non-invasive devices for body shaping, fat reduction, and skin tightening. One of its lead products, Morpheus8, is a radio-frequency-powered device that can tighten jawlines and remove wrinkles by remodeling adipose tissue that lies just below the skin surface.

Earlier this year, management told investors the company would sell 30 million units of its EmpowerRF platform by the end of 2022. This workstation includes the Morpheus8 device and sales already surpassed 30 million units in October.

A razor-and-blade business model

Sales of workstations are off the charts but this isn't how InMode intends to drive profits in the years to come. As its installation base grows so should sales of services and consumables that need to be replaced after each procedure.

In the third quarter, InMode showed its razor-and-blade business model is working as intended. Increasing use of InMode platforms that are already installed drove third-quarter revenue from services and consumables 53% higher year over year.

At the moment, the company's higher margin consumable and service segment is responsible for 12% of total revenue. To get an idea of where InMode is heading, look at Intuitive Surgical and its robotic-assisted surgical systems. It didn't happen overnight, but sales of consumable instruments, accessories, and services now make up around 73% of total revenue at Intuitive Surgical. 

ISRG Chart

ISRG data by YCharts

Over the past two decades, steadily growing sales of services and consumables allowed Intuitive Surgical to generate enormous profits. In turn, those enormous profits drove the stock to unimaginable heights. A $10,000 investment in Intuitive Surgical 20 years ago is worth around $1.3 million today.

There are no guarantees that InMode will be able to do the same over the next two decades. That said, it is on a similar path.

Despite being on a path that made millionaires out of everyday Intuitive Surgical investors, InMode is trading at a valuation that suggests growth at a low-single-digit percentage. Adding at least some shares of this stock to your portfolio at recent prices looks like a smart move.