INMD - If InMode Can Break Out Of Plastic Surgery The Sky's The Limit

2023-03-30 01:09:06 ET

Summary

• InMode is a small-cap medical device company that invented a new way to do plastic surgery in a non-invasive way, via radio waves.
• The company is dominating its niche market, and the stock is up almost 400% since the IPO.
• The potential upside of the stock is dramatically increasing as the company enters new medical markets outside of plastic surgery.

InMode ( INMD ) is an exciting little story in the world of medical devices. InMode specializes in using radio-frequency waves to enable surgeons to "operate" on a patient without cutting into them with knives. These are minimally-invasive or non-invasive devices, and I believe this is the wave of the future.

Cutting into people is an inherently traumatic thing to do. If you've seen Star Trek IV , Bones was furious with 20th century medicine: "Put away your butcher knives and save this patient before it's too late!"

I believe sooner or later healthcare will shift from the surgery model into non-invasive treatment options. While nobody can predict when this massive shift will occur, it's a wonderful idea to start investing in companies in the non-invasive surgical sector.

One stock I would suggest people buy now is InMode. The company, founded in 2008, has a whole family of minimally-invasive medical devices that doctors are using now instead of the traditional route of plastic surgery. Using radio frequency waves, doctors can now destroy fat tissue underneath the skin without invasive surgery.

InMode was founded by plastic surgeons, and they're now dominating that niche. And it is a niche. According to the company, there are 17,000 plastic surgeons in the USA. InMode has already sold 8,000 of its machines into this market (and another 9,000 abroad).

How InMode won the day in plastic surgery

InMode was able to seize market share in the plastic surgery market by introducing a non-invasive device that could remove fat. Traditionally cosmetic surgeons had two options: lasers or invasive surgeries.

Lasers are minimally invasive and safer than surgery, but their functionality is limited. Basically, lasers will remove things on a patient's skin (like hair or tattoos or varicose veins), but can't be used to do things like remove fat.

Invasive surgery is used for that. Plastic surgery has a wide range of options, but it's also invasive surgery and it's relatively dangerous. The doctor would cut into the patient with knives, remove fat tissue, and try to disguise the scars.

InMode's radio waves technology was a significant upgrade from traditional practice. Using one of InMode's devices, the surgeon simply scans the device over the targeted area. And radio waves emit from the device, obliterating fat cells underneath the skin, making fat disappear without the use of knives or cutting into the patient.

Razor-and-blades model makes InMode a strong platform stock

What's particularly likable about InMode and its business is that the company places its device in a doctor's office, and then has recurring revenue streams every time the device is used. The razor-and-blades model is a reference to Gillette back in the day. Gillette sold razors to people, and then made huge profits resupplying the blades to all the customers who had bought the razors.

Wonderful stocks like Apple ( AAPL ) and Intuitive Surgical ( ISRG ) have similar business models. Apple makes a lot of money selling its iPhone to millions of happy customers. But the real big reason Apple is so valuable is all the "services" the company provides to its locked-in customer base. Apple takes a substantial cut off all the revenues when software companies provide games or other apps in the Apple ecosystem.

Intuitive Surgical introduced a robot surgeon that promises to be more precise than human hands. Once Intuitive did the hard work of establishing a large base of hospitals and doctors that had migrated to this new technology, it had established a large platform of existing and predictable revenues that come in every time the robot is used.

The Intuitive Surgical analogy is probably most apt, since both companies are in the medical device field. Many years ago, Intuitive was a high-risk, high-reward stock. The company spent a lot of time and money getting its robots into medical schools so that doctors would train on the device. Over time the company established a safety record that convinced surgeons around the world that the machine was more precise than human hands, and more successful than human doctors.

The Intuitive story is still playing out, as more and more robots take over more and more high-risk surgeries. But INMD stock has been a major winner for risk-takers who bought shares back when the company's business was unproven. Like a lot of high growth companies, Intuitive was unprofitable in its early years while it fought to prove that the robot was safer and more effective than human surgeons. Today that battle has been won, and other companies are trying to bring their own robots into the surgical arena.

InMode is a small-cap that is already highly profitable

What's nice about a small-cap like InMode -- market cap under $3 billion -- is that it's already highly profitable, with 35% profit margins . You don't usually see that level of profitability in high growth names. Over the last five years, InMode has averaged 65% revenue growth each year (YOY). And that's with all the disruptions caused by COVID-19.

Usually, tech companies that are fast-growing small-caps, aren't profitable or have low margins as they scale their business. InMode's 35% profit margins suggest a mature business. That's a higher profit margin than Apple or Intuitive Surgical, for instance.

What that 35% margin says to me is that InMode has really vanquished the niche market of plastic surgery. IBISWorld estimates the plastic surgery market will bring in $27 billion in revenue in the U.S. this year. Selling medical devices into that market is a niche business, and if InMode were to limit itself to its original market, the company's growth plans would start hitting a ceiling.

The good news is that InMode is chasing other verticals in the healthcare space. While there are 17,000 plastic surgeons in the U.S., there are 45,000 gynecologists. Add 19,000 eye doctors and 12,500 ear/nose/throat specialists, and the company's market opportunity has increased substantially.

Overall, InMode sees a market opportunity of almost 100,000 doctors in the U.S. They've taken about 8% of that market (dominant in plastic surgeon offices, where the company started). So that's the big question facing InMode: can it expand and take share in the larger healthcare market?

In my mind, this would be a major upgrade in the business model. Right now InMode is a dominate medical device company in the plastic surgery market. But there are many, many doctors who need to reshape tissue for healthcare reasons.

InMode is cheap relative to other platform med-tech stocks

What's nice about InMode as an investment is that the downside is fairly limited. The stock has a price-to-earnings ratio of 15, which is cheap compared to low-growth monsters like Intuitive Surgical (p/e 65) or DexCom (p/e 139).

I would argue InMode is a fairly safe stock even if the company doesn't break out of its plastic surgery niche. InMode has a strong platform among cosmetic surgeons, and the company enjoys nice revenue streams from all the uses of its devices.

In its most recent quarter , InMode reported $136 million in revenue for Q4, and $454 million for the year. Not surprising for such a profitable company, InMode is sitting on a boatload of cash (roughly half of $1 billion) and has almost zero long-term debt.

If the company remains in its plastic surgery niche, it's a cash cow. With its worldwide installed base of 17,000 devices, InMode reported 749,000 consumable units sold in 2022 as doctors used their devices. So that's a beautiful and highly profitable business model (and why Intuitive and DexCom command such lofty multiples even in a low-growth environment).

The Wellness market is the key metric for future growth

What's got me excited is the substantial upside if and when InMode cracks into the larger healthcare market. If InMode can break into traditional healthcare, and establish its minimally invasive machines as a new standard of care, this could be a monster stock over the next decade.

I believe growth investors should focus on the "wellness" market, as that is where substantial gains might be found. For instance, the company's device, EmpowerRF , uses radio frequency waves to provide electrical muscular stimulation to rehabilitate weak pelvic floor muscles, treating stress, urge, and mixed urinary incontinence. The company reported in its most recent earnings call that the Empower platform brought in over $45 million in 2022 (twice as much as guidance).

Another promising market is in eye care. InMode has a device, Envision, that uses radio waves to treat dry eye caused by gland dysfunction. The machine has been certified in Canada and the company projects to launch its device in the U.S. in the first half of this year.

There are numerous prospective markets in healthcare treatments. For instance, InMode believes that its RF technology will be used in the future by urologists (treating erectile dysfunction) and dentists (treating TMJ -- joint disorders in the jaw).

RF technology has long been used in the field of healthcare. MRI (magnetic resonance imaging) is based on radio frequency waves. Now we're seeing RF energy being used in cardiology for ablative interventions , and radio frequency waves are being used to destroy cancerous tumors as well.

While it's unlikely that InMode devices will get into oncology or cardiology offices, as an RF pure-play the company is a relatively safe way to invest in the rise of non-invasive medicine.

InMode is highly profitable and the company has already established its RF solutions in the world of plastic surgery. As more and more healthcare providers look for non-invasive treatments, I expect this stock to dramatically outperform the market over the next decade.

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