As the year winds down, investors may be looking forward to 2023 and hoping for a better year in the stock market. The S&P 500 started trading in bear market territory in 2022, but it has recovered slightly over the past month.
As we approach the final month of trading and before you say goodbye to 2022, it's worth looking for companies that are on sale now and might be worth owning because of their bright futures. Within the healthcare space, there are two stocks worth digging into that I think could soar in 2023.
1. InMode: Disrupting the cosmetic surgery space
As medical technology advances, doctors are able to perform more surgeries non-invasively. This is better for the patient as it reduces pain and recovery time. InMode (INMD -1.55%) is bringing non-invasive treatments -- using radio frequency (RF) -- to the world of cosmetic surgery.
InMode came to the public markets via initial public offering (IPO) in August 2019 and in its short time as a publicly traded company it has posted impressive results. In the most recently reported quarter (Q3 of 2022), revenue increased 29% year over year to a record $121 million and net income grew 9% to $49 million.
Part of this growth is due to sales of consumables, which increased 53% year over year, outpacing revenue growth. Because many of InMode's devices require one-time use consumables, this growth indicates that the number of treatments is increasing over time.
Zooming out, the results are more impressive. Since its IPO, InMode has posted consistent growth in revenue, net income, and free cash flow.
INMD Revenue (TTM) data by YCharts
InMode is also branching out into women's health and wellness with great success. The company's EmpowerRF device launched earlier this year with a 2022 revenue target of $20 million. In the second quarter this guidance was increased to $30 million, and it was raised again to $40 million in Q3.
The global cosmetic surgery market was $19 billion in 2021 and is estimated to grow at a compound annual growth rate (CAGR) of 9.6% through 2030, showing how large the market opportunity is for InMode.
Despite its rapid growth and success, InMode's price-to-sales ratio of 7.2 is below its average of 10.7. Now is a good time to buy shares at a historical discount.
2. Outset Medical: Making kidney disease more manageable
Patients with advanced-stage kidney disease often need dialysis, a costly and time-intensive treatment that's necessary for the rest of their lives. Typically, this means going to a hospital or treatment center for multiple hours, several days per week.
Outset Medical (OM 0.86%) is trying to change that with its Tablo device. This mini-fridge-size device can be used in an acute treatment setting or in the patient's home. With minimal training and reduced cost, patients can receive treatment in a much more comfortable environment.
Prior to June, things were going well for Outset. Revenue had been growing steadily and adoption of the Tablo device was humming along. However, a six-week pause of Tablo sales in the home setting in order to allow further Food and Drug Administration approval sent the stock tumbling and created a backlog of patients seeking the device.
In the time since that home sales pause, Outset has picked up where it left off. Revenue in the most recent quarter returned to positive growth with an 11% increase sequentially and 6% year over year.
More importantly, sales of Tablo in the home exceeded management's expectations and comments on the earnings call indicated the summer sales pause was nothing more than a bump in the road. Revenue will also be aided in the coming years by a new contract with the Department of Veterans Affairs (VA) that will enable Tablo to be used in more than 100 VA hospitals as well as in the home setting.
As the company scales, there's some indication of increased efficiency. Gross margin for the quarter was 15.6%, up from 11.2% in the year-ago quarter. This shows that as the company grows it's able to reduce the production costs of the products it sells. Management expects the gross margin to continue to improve and has a target of 50% by 2025.
Outset believes the market opportunity for its Tablo device is $2.5 billion in the United States and $8.9 billion globally. These numbers should always be taken with a grain of salt, but even if they're wildly overoptimistic, Outset should have a long runway for growth.
Like InMode, Outset's valuation presents a compelling buying opportunity. The current price-to-sales ratio of 7.5 is near its all-time low of 4.8 and well below its average of 22. I believe Outset is still in the early innings of its growth story and this company could see a strong 2023.
