INMD - InMode: Why It's Now The Best Time To Buy

2023-11-27 14:00:00 ET

Summary

• InMode Ltd. investors experienced a collapse in October 2023 as INMD fell to a three-year low.
• I assessed that buyers have returned in November, potentially helping INMD to form a pivotal long-term bottom.
• InMode's best-in-class profitability and attractive valuation support the constructive buying sentiments.
• I argue why I've put INMD into my personal watchlist, as the current levels have excited me again, given its recent capitulation.

There shouldn't be any doubt that my previous bullish thesis on InMode Ltd. ( INMD ) failed to pan out, as buyers abandoned the stock and rushed out after it broke down below the critical $30 support zone in early October. That culminated with intense selling on the Israeli med tech company as investors reconsidered geopolitical risks linked to its production capacity in Israel.

As a result, INMD saw significant selling pressure in October, forcing a capitulation toward the $18.5 zone before bottoming out. The good news is that I gleaned another fantastic opportunity to pounce on INMD, which has arrived and is much better than the one in September 2023. INMD's valuation has improved to a "B+" grade relative to its healthcare sector ( XLV ) peers. In addition, it still boasts a best-in-class "A+" profitability grade, supporting the sustainability of its business model.

Med tech stocks have come under significant pressure over the past few months as healthcare investors reassessed the risks emanating from the surge in GLP-1 drugs. These weight-loss medications have seen a surge in interest, leading to significant outperformance in the Eli Lilly ( LLY ) and Novo Nordisk ( NVO ) stocks. As a result, investors are worried about whether it could lead to a significant deceleration in InMode's structural growth profile, which has since degraded.

Management's commentary at its recent third-quarter or FQ3 earnings release suggests the long-term impact of the GLP-1 drugs remains unclear. Despite that, InMode is confident that the success of these drugs should underpin an improvement in the underlying demand for aesthetic treatments leveraging InMode's minimally invasive technologies.

However, I assessed that investors were likely more concerned with its growth risks as the company continued to feel the impact of macroeconomic headwinds and high-interest rates. As a result, management's commentary suggests continued weakness in capital equipment leasing. InMode stressed that medical professionals re-evaluated the headwinds attributed to the high interest rates, contributing to a weak Q3 performance.

As a reminder, InMode posted revenue growth of just 1.6% in Q3, a significant deceleration from Q2's 20% growth. As a result, I believe the med-tech company still lacks a sustainable economic moat, notwithstanding its solid profitability.

Despite that, the company has a robust balance sheet with no long-term debt and a growing cash balance. It reported an adjusted operating margin of 43% in Q3, justifying its best-in-class profitability. In addition, InMode's cash and equivalent represented nearly 36% of its most recent market cap (as of November 24), corroborating a potential long-term bottom in November.

Management's Q4 guidance suggests its revenue growth rate has likely bottomed in Q3, worsened by seasonality headwinds. Analysts' forward estimates align with InMode's outlook, forecasting a revenue growth of 4.2% YoY, slightly below management's outlook of about 4.8% growth. As a result, I assessed that analysts have likely baked in more pessimism in its near-term execution, lifting InMode's potential outperformance.

The critical question facing investors is whether the recent buying sentiments are constructive enough to catch the falling knife.

INMD buyers returned after sellers forced a capitulation in October 2023, as INMD revisited a multi-year low last seen in November 2020. The bullish reversal in INMD's long-term chart suggests robust buying sentiments in November 2023, as INMD reached peak pessimism.

I assessed the risk/reward for INMD is attractive at the current levels, as late buyers likely fled. It's also a level that has finally gotten me extremely interested in putting this stock into my personal watchlist again at a level that I consider highly attractive.

Rating: Upgraded to Strong Buy.

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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