Owning growth stocks in a bear market can be painful; fearful investors often flee to safety, and growth stocks, typically less proven or sometimes unprofitable, can become very unpopular on Wall Street. But the whims of the market don't necessarily mean that a stock can't be a good investment; growth stocks with solid fundamentals can roar back during the next bull market, generating tremendous investment returns.
Consider two healthcare stocks with similar market caps, CRISPR Therapeutics (CRSP 1.11%) and InMode (INMD -1.55%), worth approximately $3 billion each. The stocks trade 76% and 62% below their respective highs, but one company might be better positioned to create wealth for shareholders moving forward. Below I'll outline which stock is most likely to appreciate fivefold first.
On the cutting edge of healthcare
CRISPR Therapeutics is a gene-editing company that utilizes CRISPR/Cas9 technology to create gene-based therapies to treat conditions and diseases. It uses an enzyme called Cas9 and RNA to add, edit, or remove parts of a genome. Scientists can precisely alter a genome, which the cell will repair, causing a DNA mutation with the desired effect. One of CRISPR's co-inventors, Emmanuelle Charpentier, helped start CRISPR Therapeutics.
The company is now developing several genetic therapies for treating conditions in hemoglobinopathies, immuno-oncology, regenerative medicines, and in vivo therapies (in vivo means that genetic material is delivered directly to the patient's body or target organs). CRISPR currently has five products in clinical trials, three through collaborations, and two wholly owned by the company. CRISPR hasn't yet brought a product to market; it's essentially a pre-revenue business, issuing equity over time to raise the money to fund its pipeline. The stock's $3 billion-plus market cap is how investors value CRISPR's anticipated success as products pass clinical trials and hit the market.
Disrupting the cosmetic surgery market
InMode is a medical technology company that builds and sells devices for various non-invasive cosmetic surgical procedures. The equipment uses radio frequencies and lasers to shape parts of the body, remove hair, or tighten skin. InMode's processes go further than topical treatments but don't carry all the painful implications of traditional plastic surgery.
The company generated $121 million in revenue in the third quarter of 2022, a 29% increase over the prior year. Additionally, InMode is highly profitable; it converts about 48% of its revenue into free cash flow. InMode can operate at high-profit margins because it outsources its manufacturing and is headquartered in Israel. Its expected corporate tax rate will only be about 7.5% to 10% moving forward, compared to the 21% corporate rate in the United States.
Why CRISPR stock could outperform InMode
Today, CRISPR Therapeutics and InMode carry roughly the same market cap, but what matters is where the stocks might go. InMode is a profitable and steadily growing company, but it's hard to see it reporting billions in revenue anytime soon. Analyst estimates have InMode clearing $600 million in annual revenue in the 2024 fiscal year with a growth rate in the mid-teens. Even though the stock's fall has depressed the valuation to a price-to-earnings (P/E) ratio of just 17, the stock's long-term median of 25 implies that appreciating fivefold will take many years of growth.
CRSP Revenue (TTM) data by YCharts
Meanwhile, CRISPR Therapeutics could eventually be the late bloomer that grows up to steal the spotlight. Analyst estimates call for revenue of $1.65 billion in the 2026 fiscal year, which will likely take CRISPR from almost zero revenue to more than doubling InMode's sales over time. Then you factor in how much the bear market has beaten down the stock; CRISPR has $1.9 billion in cash on its balance sheet against zero debt. In other words, nearly two-thirds of the stock's current market cap is cash.
InMode might be the safer bet; it's a proven business with steady growth and substantial profits. However, it might also have a lower ceiling and doesn't seem to have the explosive growth potential of CRISPR. You must stomach the risks of CRISPR stock, including the pass/fail nature of bringing new therapies to market (clinical trials). However, the potential impact CRISPR/Cas9 technology can make on healthcare makes the stock far more likely to become a multibagger for shareholders, especially now that the stock has fallen so much.
