Sometimes the best opportunities are found in the laggards. Take medical technology (or medtech) stocks, for example. As a group, medtech stocks haven't performed well over the last year. However, their long-term potential should be great.
Two underperforming medtech stocks especially stand out. Both InMode (INMD -0.52%) and Outset Medical (OM 1.56%) reported their fourth-quarter results this week.
Which is the better medtech stock to buy? Here's how InMode and Outset stack up against each other.
Image source: Outset Medical.
Growth prospects
InMode is an Israel-based company that makes radio-frequency (RF) energy technology used for face and body contouring, medical aesthetics, and women's health. Outset Medical is a California-based company that makes hemodialysis systems. The growth prospects for both companies appear to be strong.
On Tuesday, InMode reported record revenue of $133.6 million in the fourth quarter of 2022, up 21% year over year. It also achieved record adjusted earnings of $66.4 million. The company projects full-year 2023 revenue of between $525 million and $530 million. The midpoint of this range reflects 16% growth.
Wall Street thinks that InMode will be able to deliver average annual earnings growth of 33% over the next five years. Unsurprisingly, analysts are bullish about the stock, with the average 12-month price target reflecting an upside potential of nearly 40%.
Outset Medical announced its Q4 results after the market closed on Monday. The company's revenue jumped 15% year over year to $32 million. However, Outset remains unprofitable, posting a Q4 net loss of $41.4 million.
The company expects to increase its revenue by 22% to 30% in 2023. Over the longer term, Outset hopes to capture a big chunk of the U.S. total addressable market of $11.4 billion. The majority of this market is in home dialysis. Outset thinks that its Tablo system offers significant competitive advantages for home use.
Financial positions
InMode had a cash stockpile (including cash, cash equivalents, marketable securities, and short-term bank deposits) of $547.4 million at the end of 2022. The company should continue to be profitable. Therefore, it won't need to tap its cash to fund ongoing operations.
Outset Medical's cash position totaled $290.8 million as of Dec. 31, 2022. The company isn't likely to turn a profit in the near future, though. This means that Outset will use some of its cash to fund operations.
The good news is that management expects to burn less cash in 2023 than in 2022. Outset also has around $200 million that it can draw down with its term loan facilities.
Valuation
InMode's shares currently trade at 13.2 times expected earnings and nearly 6.9 times trailing-12-month sales. The stock's price-to-earnings-to-growth (PEG) ratio is 2.9. This level indicates a relatively high valuation based on growth projections.
Because Outset Medical isn't profitable yet, earnings-based valuation metrics aren't applicable. However, the stock trades at nearly 12 times sales.
Better medtech stock?
So which of these two medtech stocks is the better pick right now? I think that InMode is more likely to beat the market in 2023 than Outset Medical is.
Analysts absolutely love the stock. Investors cheered InMode's Q4 update. Barring a severe recession, the stock should deliver solid returns this year.
Over the longer term, though, I suspect that Outset Medical will be the bigger winner. The company is currently only scratching the surface of its opportunity in the home dialysis market.
In my view, investors don't have to go with only "in" or "out." Both InMode and Outset are great picks.
