INMD - InMode Is On Its Launching Pad Again

Summary

• I called InMode a buy in June before it rallied as much as 58%.
• We've pulled back a bunch, and I think we likely have a local bottom in place.
• I am reloading on InMode as I think it's ready for another rally.

This past June I posted a bull thesis on medical device maker InMode ( INMD ). In the nine weeks or so since then, the stock is up 28%. However, it took a ride straight to $39, or 58% higher than when the article was posted, before pulling back with just about everything else in the world the past several days. For me, the pullback into what should be great support is another buying chance on this stock that I still think is going a lot higher.

Let’s start with a daily chart.

I went through a detailed analysis of the chart in the linked article above in terms of the buy setup that materialized, so I won’t review that portion of the chart. We’re looking ahead now, so let’s focus on the right side of the chart.

We can see a few bullish things here that make me think this is not a bearish phase, but rather a consolidation of the massive rally we saw. First, the 20-day exponential moving average is well in front of the 50-day simple moving average. Anytime you have shorter-term moving averages ahead of longer-term ones, the trend is much more likely to be higher.

Second, the accumulation/distribution line continues to go higher during this pullback. That’s very bullish because it means big money is buying the stock intraday on pullbacks.

Third, the PPO is pulling right back into the centerline, which is exactly what you want during a bullish phase. This stock was overbought at $38, but it no longer is. That resets momentum and means the bulls can push again.

Finally, the candle we saw on Thursday is perhaps the most bullish thing on this chart. We had a big move down in the morning that fell below the 50-day SMA, only to rally and put in a long tail on the day. In other words, the stock was way down in the morning, looked like it was failing the 50-day SMA, but rallied in the afternoon to finish higher than the 50-day SMA. This kind of turnaround can be one of the most reliable reversal signals because the bears are in charge, only to lose the fight to the bulls in the afternoon. That's often a sign of capitulation.

With the confluence of other factors on the chart we looked at, this reversing candle looks like the “all-clear” for the next phase of this rally.

I posted a weekly chart in my prior article because the PPO was showing a massive buy signal. Let’s take a look to the chart post-buy signal.

The weekly accumulation/distribution line is moving definitively higher, as is the PPO. The latter is still well below the centerline, so there’s a lot of work for the bulls to do longer-term, but for now what’s important is the buy signal on the weekly PPO has been confirmed and then some, and we again look like we have more to go here to the upside.

Let’s now take a look at what else there is to like about InMode besides a beautiful chart.

Cash machine vibes

Lots of medical device makers have good margins, but InMode is in a class of its own. The company’s margin profile is one of the reasons I like it for a long-term hold, and not just a trade. InMode not only has outstanding margins, it also has extremely limited capex needs. That means that the mountain of cash it produces each quarter largely just stacks on the balance sheet, providing the company a lot of flexibility financially, and means it doesn’t have to go to the debt markets to fund its operations.

Below we have trailing-twelve-months values for gross margins and operating margins to illustrate the otherworldly nature of InMode’s profitability.

Gross margins have been pretty steady in the mid-80s basically forever, but one thing InMode has done in recent quarters is leverage down fixed and variable operating costs such that operating margins are nearly 50% . The company’s products have tremendous pricing power because they serve very specific purposes, and its Radiofrequency Assisted Lipolysis, or RFAL, technology means it stands out from the competition. This is also something I detailed in the prior post so if you’re curious, you can find it there.

The point for today, however, is that InMode has amazing margins and those margins should be here to stay given its competitive advantage. In other words, it's not a case of a first-mover advantage that will evaporate over time, in my view.

I mentioned modest capex needs and modest may actually be overstating capex requirements. InMode spends almost nothing on capex, so its free cash flow looks almost identical to operating earnings. Below we have TTM free cash flow and FCF margins for the past few years.

FCF in the past twelve months was $181 million, or 45% of revenue. You heard that right; InMode turns almost half of its revenue into FCF. You’d find it quite difficult to find too many businesses with that sort of efficiency, and it’s a big reason why I think InMode is a great long-term hold. Any business that can print cash like this can acquire competitors, invest in sales and marketing, buy back its own stock, or anything else it wants to do.

Speaking of investing in growth, InMode’s potential customer base is massive, and it has an army of sales professionals working everyday to help these customers understand what InMode’s products can do for their patients.

The company reckons there are about 100k surgically-trained physicians in the US, and in a variety of fields. InMode’s products have a large number of applications, so the revenue growth opportunity over the long-term is enormous. Now, there are limits on how quickly InMode can grow (staffing, manufacturing capacity, etc.) but my point is that InMode isn’t near any sort of saturation point, and probably never will be.

Let’s talk numbers

We all know that 2022 has been the year of decimated share prices and plummeting EPS estimates. However, InMode is just not bothering with any of that and instead has a rather beautiful EPS revision curve. If you looked only at this chart, you’d be forgiven for being shocked the stock is down as much as it is.

InMode’s pummeling this year was due solely to a valuation reset, and not a disruption in the business’ earnings. That’s a really important distinction, because we’ve seen pandemic darlings crushed because their businesses only work in lockdown. InMode, on the other hand, has strengthened this whole time and you get the chance to buy it much more cheaply than you could have a year ago, when earnings estimates were lower .

When I profiled InMode last time, its forward P/E ratio was about 10. Today, it’s nearing 14X forward earnings, but that’s well off the recent high. It’s also well off from the 54X earnings we saw at peak bullishness last year.

I’m not about to tell you InMode is going to 54X earnings again, but a company with 45% FCF margin, a virtually endless market to address, strong competitive advantages, and steady revenue growth can and should easily go for 20X earnings or more.

The broader market is still trying to decide if it wants to test the June bottom again so higher valuations are something we’re going to have to be patient on. But when growth stocks come back into favor (which I think will be soon), InMode stands to gain enormously.

With InMode, you get a stock with rising EPS estimates, a very cheap valuation, strong competitive advantage, and a beautiful looking chart. I’m in and I think you should consider it too.

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