InMode Stock Analysis & Deep Dive

Cosmetic surgery for your portfolio

Jul 14, 2023

Intro

Beauty has always been a great field to make money. Aging happens naturally and even with the healthiest diet and exercise, time will leave a mark on your body. InMode is working on turning back the clock for skin related aging signs.

At the same time the population is becoming more overweight and obese. Wouldn’t it be wonderful if there was a device which burns your fat and simultaneously tightens your skin? Welcome to the world of InMode.

The Company

InMode is an Israeli company and was established in 2008 and went public in August 2019. At the end of 2022, Inmode employed 480 people of which 118 joined in 2022.

Manufacturing is outsourced to three subcontractors which are all based in Israel. This leads to low inventory levels and untypical low CapEx for a hardware company. To ensure the long-term relationship with the suppliers, InMode purchased 10.3% ownership in one of them.

The IP is protected by six patents in the US with further eleven pending for approval

It’s best to let InMode introduce itself: “We design, develop, manufacture and commercialize innovative, minimally invasive and noninvasive surgical/medical products”

We are a leading global provider of innovative, energybased, minimally invasive surgical medical treatment solutions. Within the global aesthetics market, our products and solutions are primarily designed to address three energybased treatment categories comprised of: face and body contouring; medical aesthetics; and women’s health.

The Industry

Classic competitors include Botox as well as large pharmaceutical companies like Allergan.

US cosmetic surgery is a growing market with an expected CAGR of 9% for the next years. Non-invasive procedures are expected to grow a lot faster than invasive procedures.

42% of Americans are obese, while another third of the population is overweight. If we consider only the overweight part of the society as potential clients, InMode has lots of room to grow.

The Business

InMode developed its own proprietary RF energybased technologies to overcome the downsides of traditional surgeries. The company believes that these small procedures open the doors for a new customer segment, which would not have undergone classic surgeries. The main benefit for the customers are: small to no scars, no required anesthesia and RF energybased technology simultaneously kills fat and tightens skin while being less expensive than full surgery.

Inmode has launched ten platform since 2010. Each platform consists of the energy source, a hand piece or hand free controls and the proprietary software of InMode. All of these platforms can be upgraded. InMode has 29 FDA clearances and 84 peer-reviewed publications.

InMode is currently developing further platforms to tackle adjacent fields: treatment of eyelid contractions and dry eyes, a hand piece to treat snoring and a new device to treat Erectile Dysfunction. Most of these are in early stages but they offer a glimpse into the broad field which InMode is working on.

To make sure, that the physicians using the devices are properly trained, InMode offers after sales training and support.

The largest market for InMode is the US with 65% of all revenues. Most of the revenue comes from the sale of minimal invasive platforms. The install base in the US is 8400 platforms, while in the rest of the world there are roughly 10.000 platforms. In the last five years, InMode sold 1.6m pieces of consumables and estimates that the revenue from consumables will rise with the growing install base. In 2022 the revenue from consumables was 13%. Quite often the margin on consumables and accessories is higher than the original machine sale and a great way to increase the margin.

InMode believes to be the leader in RF technology which is also used in MRI, surgical diathermy (the use of high frequency alternate polarity radio-wave electrical current to cut or coagulate tissue during surgery)

Now to the applications and some technical topics (I am no doctor and will do my best to explain it for the ordinary reader who is interested in stocks). Most of the applications center around destroying fat and shirking or remodeling the tissue/skin of the patient.

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RadioFrequency Assisted Lipolysis.

Lipolysis is the metabolic process to break down fat into their constituent molecules: glycerol and free fatty acids. To summarize it in simpler terms: The radio frequencies are used to heat up fat and liquefy it. To achieve that, the the patient’s tissue is heated up to 50° to 70°C. This liquefyd fat can then be extracted with a suction cannula. At the same time the tissue shrinks and can be remodeled during the procedure. Until the end of 2022 more than 190k procedures have taken place using this method.

Next to minimal invasive surgery tools, InMode is also working on non-invasive aesthetic procedures. These include fat killing and skin tightening and hair reduction. One of these machines is the Evoke face device. To get an idea what this looks like, watch this short video. To quote the surgeon. “it’s like a miny facelift without surgery, … it’s like a lunch time procedure”

Other hands free treatments look like those below

The Management

The two founders Moshe Mizrahy and Dr. Michael Kreindel founded Syneron Medical before. Syneron Medical focuses on cosmetic surgeries like hair removal and wrinkle treatments. The CEO and co-founder Moshe Mizrahy is already 70 years old, while the CFO Yair Malca is 45 and joined in 2017. Dr. Michael Kreindel is the other co-founder and serves as the CTO.

Major sharholders include the CTO with a 4.2% and the CEO with a 3.5% share of the company. I like it when the management also has a monetary commitment to the company.

In the last three years, InMode bought back $95m in shares. The management has shown to put the cash to good use.

Risks

With a market cap of $3.2bn, InMode is relatively small and has larger fluctuations in share price than larger and more established companies. The biggest risk lies in the patents. If the IP is not properly protected, a competitor can easily develop a similar system. The very low R&D spend of InMode shows that the devices are not rocket science.

The Fundamentals

With gross margins of 84%, InMode is selling the machines at a very nice markup. R&D expenses of $12.7m are neglectable when you make $474m in revenues. The biggest expenses are sales and admin with $181m. This left $204m in operating income or an operating margin of 43% in the last twelve months.

InMode has a very strong track record. Revenue grew from $53m in 2017 to $454m in 2022. Net income and Free Cash Flow followed suit and follow the revenue growth. InMode operates at a Free Cash Flow margin of 40% which is usually only achieved by highly profitable SaaS companies.

Valuation

InMode has no debt and 17% of its market cap in cash. The cash is working for the company and InMode made $6.6m in interest income in the last twelve months.

InMode has a history of beating the market expectations. With a growth forecast of 16% for the next years it is obvious, that InMode is currently trading at a very attractive level. If we apply the growth to the FCF, we are looking at an EV/FCF valuation of 14.2 in two years.

Summary

I started writing the analysis when the share price was still below 40$. The recent jump above the 40$ resistance clears the path for more gains in the future. If we assume a “fair” valuation of such a fast growing company at an EV/FCF of 25 in a year, the stock has plenty to gain. Even at the ATH of ca. 100$ per share, the company would not be expensive given the underlying growth trends and profitability.