For thousands of years, people have sought to improve their physical appearances with all sorts of aesthetic interventions ranging from the banal to the bizarre. For a much shorter period of time, canny investors have been able to profit by placing their bets on the companies developing the most sophisticated tools and products in the beauty field. Enter InMode (INMD -0.97%), a rapidly growing Israeli business that develops fat-liquefying and skin-tightening devices for use by plastic surgeons and medical aestheticians.
InMode's share price is near $32.40 right now, but on average, Wall Street analysts have its one-year price target at around $50.40, which implies they think its shares could grow by more than 55.5%. If we assume that the market will return somewhere between 10% and 13% in 2023 -- in line with its long-term annual average -- InMode is a shoo-in to beat the market.
In my view, its two-pronged growth strategy and its currently favorable valuation give it a solid chance to produce supercharged gains in 2023.
Adding products and spreading out across the globe
InMode's product lineup features a bevy of workstations that clinicians use to tighten people's skin, remove wrinkles, and tone muscles, among other applications, most of which are noninvasive or minimally invasive when compared to aesthetic surgery. Those workstations have attachments like applicator wands and other accessories which enable users to perform numerous beautifying tasks in the same domain.
So far, its product seems to have found a good fit in its target market. The company's profit margin is quite wide, at above 40.9%, and over the last three years, its trailing 12-month revenue rose by 159.4%. Likewise, the stock price has grown by 54.2% over that time, handily topping the broader market's rise of around 21.5%.
In the years to come, InMode's sales should accelerate as a result of two initiatives. The first is its standing commitment to funding research and development in support of inventing new devices and consumable products to use with them. In the third quarter, it spent only around 2.6% of its revenue on R&D, which isn't much. Nonetheless, management thinks that's enough to fund its development pipeline, which includes a few products in line with the company's traditional offerings such as noninvasive face and body reshaping projects, as well as treatments for dry eyes and even rhinitis (runny nose).
Management also expects its R&D efforts will generate new consumable products that will drive that segment's growth and lead to it providing a higher proportion of overall revenue. For reference, in the third quarter of 2022, consumables accounted for $13.9 million in sales out of InMode's $121.2 million in net revenue. That consumables revenue will be recurring in nature, as the owners of its workstations will need to steadily reorder to more use with their devices if they want to keep offering treatments.
But R&D takes time to pay off. InMode only launched two new product platforms in 2021, one of which was a replacement for an older device in its lineup.
The second initiative could be even more impactful than the first in the short term. The company plans to expand its commercial operations into Asia and Europe before midyear, though it anticipates its sales in North America will remain strong too.
Load up on shares while they're affordable
Yet another factor driving InMode's worthiness as an investment now is its relatively cheap valuation. Its price-to-earnings ratio is 18.5, which is a fair bit lower than the medical device industry's average of 26.4. The market may already be noticing that disparity and bidding up InMode's shares. The stock is up by 21.5% in the last six months alone, smashing the market's returns of around 4% over that period.
But, there have been a few bumps in the road that present an opportunity for investors. On Jan. 11, the company published a sneak peek into its Q4 and full-year earnings for 2022, and the market's reaction was quite negative. Still, the update estimated that InMode would bring in roughly $527 million for the year, which is higher than the $450 million estimate of Wall Street analysts on average. While it's true that an economic slowdown might impact sales and that no business can grow rapidly forever, it's likely that the decline was a blip in the big scheme of things, and it doesn't impact the long-term investing thesis for the stock whatsoever.
By the time the company is several quarters deep into its global expansion, it will likely be too late for new investors to buy in at these bargain levels, though the stock could well continue to rise beyond that point anyway. Therefore, starting a new position in InMode sometime in the first half of this year would be a good move. Barring unforeseen circumstances, there's a good chance that it will continue to beat the market in 2023.
