INMD - InMode: Growth Overhang Creates A Fantastic Opportunity

2023-06-05 11:00:00 ET

Summary

• InMode stock has underperformed the S&P 500 significantly since our previous update, as we urged investors to be cautious.
• INMD has failed to clear the $40 resistance level decisively since August 2022. Its tepid forward guidance indicates that the sellers were right.
• However, INMD has reversed its downtrend bias and supports investors buying the dips.
• I assessed that patient investors waiting for an opportunity to buy more should capitalize while the market is still pessimistic.

Investors in InMode Ltd. ( INMD ) have had to manage a great deal of frustration as INMD has underperformed the S&P 500 ( SPX ) ( SPY ) significantly since my previous update in October 2022.

The SPX has surged nearly 17% since then, compared to INMD's almost 4% slide. While I highlighted that INMD likely bottomed out decisively in May 2022 (and remains so), I also cautioned that the "lack of significant growth catalysts could hamper its recovery."

That thesis hasn't changed, as InMode's dip buyers seem to lack sufficient conviction to hold on to their bets. Accordingly, INMD has been unable to breach the $40 critical resistance level decisively, with sellers holding firm at that level since the first test in August 2022.

InMode tried to lift investors' sentiments in April, as the company posted a prelim-Q1 earnings update by guiding revenue and earnings above the previous analysts' estimates.

However, that initial booster proved to be a bull trap or false upside breakout, allowing earlier dip buyers who bought the lows in March 2023 to cash out, leaving the late buyers at its April highs to hold the bag. Was it justified?

InMode's first-quarter earnings release was robust, corroborating the prelim guidance. However, buying sentiments over the past four weeks have remained languid, suggesting investors aren't excited about the forward prospects .

As such, I believe investors must remember that the market is forward-looking. Accordingly, I have consistently reminded members of our service that price action is forward-looking and provides clues into what market operators think. With that, we can make sense of and devise buy/sell strategies that help improve our risk/reward profile and reduce the chances of being blindsided by negative surprises.

Keen investors should recall that management proffered tepid guidance in its recent earnings scorecard. As such, I assessed that March dip buyers who astutely took profit at INMD's highs in April as it approached the $40 resistance level did the right thing.

Why? InMode posted revenue growth of 23.5% in Q1 and an adjusted EPS growth of 30%. All was well and good in Q1. However, investors must remember that the market is a forward-discounting mechanism. InMode's FY23 outlook indicates that growth is expected to slow much further.

Management telegraphed revenue of $527.5M at the midpoint of its guidance range. As such, it represented a midpoint revenue growth of 16.1% YoY. It's a marked slowdown from last year's 27% increase and a sharp slowdown from Q1's 23.5% growth.

Likewise, its midpoint adjusted EPS guidance of $2.59 for FY23 implies a 7% upside compared to last year's 18% growth. Therefore, I believe it's pretty clear that investors counting on InMode to continue posting rapid growth rates moving ahead aren't living in reality.

However, management's optimism in its earnings commentary doesn't align with the significant growth slowdown implied in its outlook. For instance, Chief Medical Officer Spero Theodorou articulated:

There is a discrepancy between the macro picture and what people are saying, what we're seeing on the ground in demand for patients and doctors. We don't see any slowdown. The demand is very high. - InMode FQ1'23 earnings call

However, I think investors aren't buying it, and justifiably so. If the potential upside is so good, its guidance should reflect it and not be overly conservative. Notwithstanding, management assured investors that the company tries "to be very conservative with guidance."

Hence, investors must assess and decide whether management is sandbagging to outperform subsequently. Or is the company facing a structural slowdown in underlying demand that could dampen investors from buying aggressively and holding on to their bets?

Again, we can assess INMD's price action to make that call.

As mentioned earlier, INMD bottomed out resoundingly in May 2022. Based on its current price action, it has already reversed from a medium-term downtrend to a nascent uptrend.

However, the $40 resistance level continues to see buyers struggle to hold on to their bets. As such, it's crucial to buy at levels that proffer investors a reasonable margin of safety from that level to improve their risk/reward.

I assessed that buying INMD's recent dips should be reasonable, with Seeking Alpha Quant's valuation grade of "C+" suggesting its valuation is pretty balanced. Hence, its valuation isn't aggressive, and dip-buying sentiments at the current levels have remained constructive.

Also, InMode's solid profitability bolsters its competitive advantage as it expands into new growth areas outside its leadership in cosmetic/plastic surgery. That could assure investors the company has a defensible economic moat while attempting to chart other opportunities. Also, Seeking Alpha Quant's "A+" profitability (the best possible) grade underscores my conviction.

With that in mind, I assessed that the risk/reward for dip buyers looking to add more positions at the current levels is constructive.

Rating: Buy (Revised from Hold).

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

We Want To Hear From You

Have additional commentary to improve our thesis? Spotted a critical gap in our thesis? Saw something important that we didn’t? Agree or disagree? Comment below and let us know why, and help everyone in the community to learn better!

For further details see: