INMD - InMode: Be Greedy When Others Are Fearful

2023-09-04 09:00:00 ET

Summary

• InMode investors experienced significant volatility as INMD was hammered after its pre-earnings surge. As a result, it nearly gave up all its July gains.
• Investors are likely still concerned about the impact of high interest rates on medical capital equipment spending. Also, InMode's revenue growth could slow further through 2025.
• Despite that, dip buyers returned with conviction over the past two weeks, likely seeing attractive value in INMD following the steep plunge.
• I assessed that INMD is well-supported by buyers betting on its bullish recovery. With the market fearful, given the steep selloff, this is the time to be greedy.

I upgraded InMode Ltd. ( INMD ) stock in June 2023 as I anticipated a robust continuation of its medium-term uptrend bias moving ahead. That thesis played out accordingly, as INMD bottomed out in early June and continued grinding higher.

The slow and steady accumulation phase then transited into a momentum spike as the company released a robust prelim-Q2 earnings release in mid-July, causing INMD to surge toward its July highs. However, that spike has been nearly fully digested, as INMD fell back in mid-August toward its early July lows before buyers were assessed to return.

Therefore, I believe it's an opportune moment for me to revisit the current buying levels for INMD investors to ascertain whether it's apt for them to continue adding exposure following the steep pullback.

Keen investors should recall that InMode upgraded its full-year FY23 guidance at its prelim-Q2 release in mid-July. Accordingly, InMode guided revenue of $535M at the midpoint for FY23, which was unchanged from its actual release and update at the end of July. Hence, I believe it should be clear that the market astutely priced in its upbeat guidance in mid-July, drawing in over-optimistic investors into the surge before sellers digested that momentum, taking profits.

I gleaned management's commentary at its earnings conference but didn't assess any significant red flags that could have led to the sharp selloff post-earnings. Nonetheless, some concerns were highlighted by analysts on the call, as they discussed whether the high interest rate environment could affect the demand for medical capital equipment spending in the near future.

InMode stressed that while it saw pull-forward spending in Q2, it still expects Q4 to be a strong quarter. However, it highlighted that Q3 is expected to be somewhat tepid due to seasonality factors but nothing out of the ordinary. In addition, sales in Europe remained robust, and the robust 44% revenue growth in consumables was highlighted for Q2.

Notwithstanding management's optimism and constructive commentary, investors might be cautious about the overall macro conditions, as a higher-for-longer interest rate environment could curtail equipment spending in the medium term. That said, the recent inflation and employment data suggest that the Fed should be close to peak rates. It should provide InMode and its medical customers more clarity in their forward planning as they assess the impact on equipment spending.

Revised consensus estimates have likely baked in the expected growth normalization. Accordingly, InMode's revenue growth is estimated to decelerate to 18.7% in FY23 and could fall further to 13.9% in FY25. Notwithstanding the normalization phase, InMode's adjusted EPS growth trajectory is expected to bottom out in FY23 before inflecting higher from FY24.

As such, I assessed that the robust dip buying sentiments assessed in March and May 2023 reflect investors' confidence in the company's outlook and earnings accretion. However, investors are urged not to chase INMD's momentum spikes, as it's a relatively volatile stock. While the company has solid fundamentals and a defensible economic moat through IP protection and network effect, buyers must remain circumspect to improve their risk/reward performance metrics.

INMD has regained its medium-term uptrend convincingly. As such, dip buyers looking to buy significant pullbacks should remain confident. With a "C-" valuation grade, INMD is likely in the fair value zone, with its risk/reward well-balanced.

Despite that, it has a best-in-class "A+" profitability growth grade, supported by industry-leading "A-" grades in earnings revisions and buying momentum.

In addition, INMD's price action is constructive, indicating that buyers have confidently bolstered steep pullbacks, forming higher low market structures since its long-term low in May 2022.

As such, I'm confident that INMD is on track to attempt another re-test of its July highs before momentum investors return to help it rally further to regain control of its $55 resistance level. Average analysts' price targets or PTs of $55 corroborate my conviction that INMD remains attractively priced at the current levels.

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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