Babylon Capital® Quality & Valuation Analysis On Inmode | Why Inmode Deserves To Be In Your Watchlist

Inmode INMD is a company in the medical technology sector that focuses on creating and producing advanced medical devices for aesthetic and surgical procedures. INMD deserves to be in your watchlist because it’s an undervalued high-quality business with long-term potential.

• NTM Price to Earnings Ratio: 14.94x
• Mean Since 2019 IPO: 22.47x
• NTM Free Cash Flow Yield: 6.28%
• Mean Since 2019 IPO: 5.35%

Today, investors can receive ~50% more in earnings per share and ~17% more in free cash flow per share.

Before analyzing INMD’s valuation further, let’s have a look at why INMD is a high-quality business.

BALANCE SHEET:

• Cash & Short-Term Investments: $574.45M
• Long-Term Debt: $0

INMD has a strong balance sheet.

RETURN ON CAPITAL

• 2017: 39.6%
• 2018: 67.2%
• 2019: 32.9%
• 2020: 28.4%
• 2021: 39.8%
• 2022: 35.4%
• LTM: 33.6%

RETURN ON EQUITY

• 2017: 55.8%
• 2018: 64.5%
• 2019: 54.0%
• 2020: 34.5%
• 2021: 49.2%
• 2022: 33.3%
• LTM: 34.0%

INMD’s return metrics are stellar, highlighting the financial efficiency of the business.

REVENUES

• 2017: $53.46M
• 2018: $100.16M
• 2019: $156.36M
• 2020: $206.11M
• 2021: $357.57M
• 2022: $454.27M

FREE CASH FLOW

• 2017: $14.42M
• 2018: $36.51M
• 2019: $61.51M
• 2020: $78.76M
• 2021: $173.95M
• 2022: $180.00M

INMD has demonstrated impressive growth over the past six years, even amidst the recession triggered by the pandemic in 2020. It is worth noting that the company achieved profitability as early as 2016 but made the strategic decision to postpone its initial public offering (IPO) until 2019. This highlights the company's deliberate approach in ensuring a strong market entry and reflects its confidence in its financial performance and long-term prospects.

INMD’s management deserves credit for providing a suitable IPO to potential investors, and this, along with other factors (e.g. >10% insider ownership), demonstrates that management's interests are aligned with shareholders.

As you can see, INMD has many of the qualities you’d want to see in a stock.

Now let’s shift our focus to valuation.

INMD appears to be undervalued considering the fact that investors can receive ~50% more in earnings per share and ~17% more in free cash flow per share. Considering this, If INMD were to trade at a valuation between its average P/E Ratio and FCF Yield, based on current fundamentals, INMD would be worth ~50 per share. Given the combination of its compressed multiple and future growth projections, this appears more than reasonable. 

Nevertheless, investors must be aware of the fact that INMD is still a very young mid-cap business. With young businesses and new technology comes a substantial amount of uncertainty and RISK. Investors can mitigate this risk by allocating a smaller percentage of investable assets to INMD.

Therefore, if INMD underwhelms investors in the coming years, it will have minor impact on a portfolio. However, if INMD manages to unlock its potential, such as gaining approvals for the use of its radiofrequency based technology and devices in non-aesthetic applications, even with a small allocation, it has the potential to significantly impact the value of a portfolio.

Thus, when considering an appropriate position size and taking into account its future potential, INMD becomes an attractive investment with a favorable risk-reward profile.

Disclosures: I am long INMD. Babylon Capital® and its representatives & client(s) have positions in the securities discussed in this article. The information contained in this article is intended for informational purposes only and should not be construed as investment advice to meet the specific needs of any individual or situation. Past performance is no guarantee of future results. Information contained in this article has been obtained from sources believed to be reliable but is not guaranteed as to completeness or accuracy.