INMD - InMode Is Inherently Undervalued - Bullish Support Observed

2024-01-02 10:00:00 ET

Summary

• INMD continues to report robust consumable sales, with the downgraded FY2023 top-line guidance only attributed to the elevated interest rate environment.
• With the Fed already signaling a potential pivot in Q1'24, investors only need to be patient for its eventual upward re-rating and equipment sales recovery.
• However, most US-traded Israeli stocks are likely to be depressed in the intermediate term for so long that the conflict is not resolved.
• Anyone who buys here must also temper their expectations, since INMD's eventual recovery may take longer than a few quarters.

We previously covered InMode (INMD) in September 2023, discussing the stock's bullish support as it continued to chart lower lows/highs despite the FQ2'23 double beats, raised FY2023 guidance, and optimistic forward commentary.

Despite so, we had continued to rate the stock as Buy, since we still believe that its aesthetic offerings would be popular with consumers as the management diversified its RF technology across medical applications.

In this article, we shall discuss why we maintain our Buy rating despite the massive plunge over the past three months, with INMD still reporting robust consumable sales with the downgraded FY2023 guidance only attributed to the elevated interest rate environment.

With the Fed already signaling a potential pivot in Q1'24, investors only need to be patient for its eventual upward re-rating and sales recovery.

The INMD Investment Thesis Has Been Notably Discounted Here

For now, INMD has reported top and bottom line misses in its FQ3'23 earnings call, with impacted revenues of $123.11M ( -9.5% QoQ /+1.6% YoY) and adj EPS of $0.61 (-15.2% QoQ/-7.5% YoY).

In addition, the management has lowered its FY2023 revenue guidance to $505M (+11.1% YoY) and adj EPS to $2.55 (+5.3% YoY) at the midpoint, compared to the previously raised guidance of $535M (+17.7% YoY) and $2.62 (+8.2% YoY) offered in the FQ2'23 earnings call, respectively.

These numbers tentatively imply that its equipment sales are not as resilient to the economic downturn as discussed in our October 2022 article here, worsened by the eyewatering leasing costs of up to 15% in an elevated interest rate environment.

However, we must remind readers that INMD's offerings remain highly sticky, as observed in its growing consumable sales of $17.86M by the latest quarter (-17.3% QoQ/+28.3% YoY), with the QoQ decline only attributed to the seasonal decline in aesthetic treatments during summer months as demand usually ramps up during winter months.

Most importantly, reader may also want to note that the management remains highly confident in its ability to achieve the FQ4'23 revenue of approximately $139.7M (+13.4% QoQ/+4.5% YoY), with them promising to " notify everybody if it will not happen."

With the new year already here, there is no reason to believe that INMD may miss its own guidance in the upcoming earnings call.

The Consensus Forward Estimates

For now, the consensus has moderately lowered their forward estimates through FY2025, with INMD expected to generate a decelerating top/bottom line expansion at a CAGR of +7.8%/+4.7%.

This is compared to the previous estimates of +16%/+12.5% and its historical growth at a CAGR of +64.3%/+70.81% between FY2016 and FY2022, respectively.

INMD Valuations

As a result of the lowered guidance and the ongoing conflict in Israel, it is unsurprising that INMD also trades a notably impacted FWD EV/Sales valuation of 2.41x and FWD P/E of 8.99x.

This is compared to its 1Y mean of 3.94x/12.36x, 3Y hyper pandemic mean of 7.47x/24.03x, and sector median of 3.68x/19.13x, respectively.

Depending on how the situation develops, we can understand why Mr. Market prefers to err on the side of caution, since it remains to be seen if INMD may be able to generate a similarly robust hyper-pandemic growth in its top/bottom lines ahead.

This may lead to the stock's consistently downgraded valuations before consumer demand and the company's sales return to healthier levels once the macroeconomic outlook normalizes.

However, this may be the silver lining to INMD's investment thesis, since the stock is inherently undervalued here.

For example, the management remains laser focus on healthy gross margins of between 83% and 85% ahead, naturally contributing to its growing cash hoard of $675.85M (+7.3% QoQ/+38.9% YoY) by the latest quarter.

Combined with its zero debts and minimal shareholder dilution, the stock's book value per share continues to improve to $8.64 (+8.1% QoQ/+39.8% YoY) as well.

This indicates INMD's inherent undervaluation with a Price/Book Value valuation of 2.57x, compared to its FQ2'23 valuation of 5.36x and the sector median of 2.67x.

While it is uncertain when the stock may be eventually rerated near to its historical means and sector median, we believe that these levels offer value-oriented investors with an opportunistic entry point.

The INMD management has also made great strides to expand the use of its RF technology to non-surgical medical platforms across feminine care and ophthalmology, beyond the conventional aesthetic uses.

This allows the company to tap on the expanding global Radiofrequency Based Devices market size of up to $6.6B by 2027, with it likely to command a leading market share as the minimally invasive technology and platforms are adopted across different use cases.

Lastly, the cooling inflation is already here with the Fed also signaling a potential pivot from Q1'24 onwards. With the elevated interest rate environment to moderate from these peak levels, we may see INMD's top-line pick up over the next few quarters, further aided by the robust consumable sales.

So, Is INMD Stock A Buy , Sell, or Hold?

INMD 5Y Stock Price

On the one hand, our Hold rating on the INMD stock in our last article has been proven wrong indeed, with it breaching the March 2023 support levels of $30s and down by -31.70% over the past three months.

On the other hand, it appears that the stock has finally found bullish support at $19 by early November 2023, with it forming higher highs and higher lows since then.

While it remains to be seen if this floor may be sustainable, INMD investors appear to have been encouraged by the management's assurance that it does not "anticipate any interruption to production/delivery " from the ongoing conflict in Israel.

This is one of its global inventories sufficient to meet demand for at least six months and "contribution of revenues generated from Israel at less than 1%." The bullish support is meaningful indeed, despite the lowered forward guidance as discussed above.

For now, with the worst already baked in and the stock inherently undervalued, we continue to rate INMD as a Buy, though with no specific entry point since it depends on individual investors' dollar cost average and risk appetite.

There is a caveat to this investment thesis indeed, since it remains to be seen when the ongoing conflict may be resolved with it appearing to take " many more months " to end.

We believe that there may be moderate volatility ahead, with most US-traded Israeli stocks likely to be depressed in the intermediate term. Therefore, anyone who buys here must also temper their expectations, since INMD's eventual recovery may take longer than a few quarters.

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