InMode: High Quality Growth Business in the Age Old Market for Youth and Beauty

As regular readers know, when I look for companies to invest in, I think the presence of a sizeable economic moat is very attractive as this type of protection against competitors often allows us as investors to enjoy years of compounded growth. Things get really exciting when this kind of strong and defensible market position comes about in a large and fast-growing market. If I ask you to name the biggest and fastest growing market sectors, I am sure that many of you will think of technology-orientated ones. But did you know that the vanity market (including cosmetic surgery and non-invasive solutions) is at least as attractive as many pure technology sectors, and is projected to reach c.$67bn by 2026? To put this in perspective, the cybersecurity market is slated to reach ‘only’ $40bn in the same timeframe!

Taking a broader view of the market for beauty and youth, the current worldwide cosmetics market is valued at approximately $380Bn and is expected to surpass $460Bn by 2027. If cosmetics were a nation, it would be ranked #30, just behind the United Arab Emirates which has a GDP of $383Bn! That figure only includes cosmetics & not fashion, plastic surgery, fitness etc. The quest for youth and beauty is as old as time itself and thanks to new technology, more effective products and treatments have been developed and are gaining adoption worldwide.

All this evidence shows that the market for beauty procedures is not only here to stay but truly enormous and growing strongly. I believe the growth is being turbocharged by a number of factors including the explosion of social media,transformational technological innovations (making procedures more effective and less invasive) as well as the all-important demographic driver of cash-rich baby boomers increasingly choosing to spend their money on the quest for youth and beauty. In the stock market as a whole, it isn’t often that you come across a company with a very strong market position in such a large and fast-growing market which also has an unblemished track record of consistent and explosive sales and profit growth. But there is one such company within this attractive sector which I hold in my personal portfolio that I would like to tell you about today.

Big picture: what are the ideal attributes of an ideal company to invest in? Here are my top ideals:

• Evidence of strong sustainable sales growth (top line being the proof in the pudding that customers are choosing the company’s offering versus the competition)

• A solid balance sheet (giving the company options to pursue its growth plans and a safety cushion in tougher times)

• Efficient deployment of capital (high ROC and high margins are the cornerstones of superior shareholder returns)

• High insider ownership (management with long term commitment to the business whose interests are aligned with ours as shareholders)

• Deep economic moat to protect them against competition and allow for compounding of returns

• A product or service that people will still want in a variety of economic conditions

• Management with a track record of flawless execution to plan and long-term vision

Incredibly, the company I would like to tell you about today - Nasdaq listed InMode (INMD) - has everything on this checklist!

Price data correct as of February 10th 2022.

Source: MSN Money
Past performance is not indicative of future performance.
The price may increase or decrease as a result of currency fluctuations.
Figures refer to price data between August 2019 and February 2022.

InMode Business Description

InMode was established in 2009 by Dr. Michael Kreindel and Moshe Mizrahy as co-founders. The company raised $3.5M as seed investment (the only capital that was raised by the company until the IPO in 2019) from the founders and an Israeli-based VC Fund. InMode is a global healthcare equipment company that currently designs, manufactures & markets minimally invasive aesthetic medical devices. The company sells equipment on 6 continents. In North America, InMode sells its products directly to doctors & clinics. Elsewhere in the world, InMode operates through its wholly owned subsidiaries to sell its products or sells to distributors.

INMD has had tremendous success and executed its growth plans flawlessly. The company currently achieves operating margins of a mind boggling 85%! In the past year, sales are up 184%, operating income is up 318%, and net income 366%. InMode is sitting on $322m in cash, according to data from Stockopedia.

In my opinion, management’s flawless track record is hugely impressive as is the surprisingly high 85% gross margin that they achieve. Mizrahy claims he “would not start any development that I would not know from the drawing board that I can exercise an 85% gross margin. That’s a must for me. And basically, and you know, we’ve been showing it for almost 6 years that our gross margin is 85%.” So unlike many growth businesses today, the 85% gross margin is not the hope. It’s the expectation!

Inmode’s most important market is North America where it sells its platforms and disposables directly to doctors and clinics. It also provides its customers with training and marketing assistance while at the same time marketing the possibility of improved beauty without plastic surgery. Paula Abdul is currently one of the brand ambassadors.

The potential market is not only large but here to stay. When your end product is youth and beauty, everyone is a potential customer. Every person on this planet will get older and most will get fatter. To address this, there is a major void that INMD can fill: Inmode’s bi-polar radio frequency assisted lipolysis technology offers a far cheaper price and less invasive procedure than plastic surgery.

But what is really exciting is that the beauty market isn’t even the extent of Inmode’s product application potential. Beyond the strictly beauty focused market, InMode’s medical devices have uses in other large markets such as gynaecology and dermatology. In terms of expanding into the necessary treatment market from the discretionary beauty market, the company’s technology has many other possibilities which are currently in development.

A unique competitive advantage is Inmode’s model workstation approach: you buy one RF machine, but you can buy several attachments to expand your business into different body parts. The attractions of this more flexible/lower commitment business model to the company’s doctor customers is clear. This strategic approach is also why the business has a natural propensity to expand with existing clients. So the repeat business and growing recurring earnings from its existing customers in addition to the sales of services and consumables provide a solid foundation to the company’s growth prospects. The track record of the company shows that all this growth has been delivered flawlessly by a very strong and committed management team.

InMode Created Their Own Highly Profitable Niche!

INMD has very successfully created and filled a ‘treatment gap’ between highly effective but very invasive and costly plastic surgery and less effective and cheap laser procedures (shown below). They dominate this middle ground which has proved very popular with customers for obvious reasons. Based on their targeted demographic and international expansion plan, I believe that the growth and popularity of this middle ground is very likely to continue. I think people assume INMD is operating in a small niche, but as the market size figures I quoted above demonstrate, the vanity market is in fact not only very large but it’s growing strongly, boosted by a range of structural and demographic factors.


Source: Slide from investor presentation

InMode’s Technology Explained

InMode’s product is based on Radio Frequency (RF) technology. CEO Moshe Mizrahy has made it clear that InMode did not invent monopolar RF energy. Monopolar RF energy has been used in electro-surgical procedures for many years. “The application of RF energy causes controlled tissue heating with consequent cell protein denaturation and desiccation, which leads to cell death and tissue destruction.” Since 1925 RF has been used in the medical field to treat everything from cancer, to asthma, fibroids, and chronic pain.

During the founder’s time at Syneron, Mizrahy’s R&D team managed to merge the IPL (Intense Pulse Light) Laser technology with that of the RF one to create a new technology. He referred to this as “a real success story” and they called the new machine ELOS. But the new technology was not yet completely fit for purpose since it could not “go deep enough to do facial & body reshaping.”

Starting from this innovation, InMode developed a new form of RF which is in between 2 electrodes called bipolar RF. This “in between the electrodes” is the key to InMode’s technology and led to what Mizrahy called “RF assisted lipolysis” using “bipolar RF energy.” The main difference between bipolar RF and monopolar RF is that in bipolar RF, the RF energy is applied between the 2 electrodes. Mizrahy explains how one electrode is inserted into the subdermal fat while the second electrode is on the skin, outside of the body. This allows the doctor to know exactly how much energy & temperature to apply to get the desired result. The technology can melt fat, suck it out, or reposition it, while simultaneously tightening the skin. This is huge since the alternative is plastic surgery. With any surgery comes a medical team, a hospital setting, anaesthetics etc. With InMode’s technology, the minimally invasive procedure can give a similar result in the doctor’s office, with less downtime, less adverse effects, and at far less cost.

For example, the cost of a tummy tuck is around $10,000 in the US and it can take weeks to fully recover. The BodyTite procedure from InMode can be done in 30-90 minutes on an outpatient basis for around $5,000. Some say “BodyTite is so non-invasive that it’s more akin to going to the doctor to have a shot than to have a surgical procedure.” Plastic surgery also involves cutting the skin for the surgery whereas the RF technology actually shrinks the skin instead of cutting it.

InMode’s Newest Technology Platform: Empower

But Inmode isn’t resting on its laurels. They are just at the beginning of finding newer applications for their technology. For example, Mizrahy claims the Empower platform that was just launched can treat a broad range of conditions related to women’s wellness therapies, including blood circulation, pain relief, pelvic floor weakness along with stress, urge and mixed urinary incontinence.

Stress urinary incontinence, or SUI, is a leakage of urine during physical activity, and a highly embarrassing problem to have. The current treatments are behavioural remedies, vaginal inserts, or surgeries such as a Sling procedure or Retropubic Colposuspension. A urethral sling procedure can take up to 6 weeks to recover from. The catheter is removed after 10 days from a retropubic colposuspension. This is after spending 2-3 days in the hospital… and running the risk of complications.

The new Empower platform actually represents a big leap for the company from elective beauty procedures to necessary treatments aimed at fixing health issues. Obviously, this opens up the very real possibility that some of InMode’s procedures may now be covered by insurance instead of having to be paid for by the patient. For example, currently retropubic colposuspension is covered by most US insurance plans. As are several other conditions treated by the Empower workstation such as chronic pain and blood circulation.

To my knowledge, InMode currently does not currently have any platforms that are covered by insurance, but it seems logical that by moving the technology into necessary health treatments, insurance coverage of procedures will follow.

The attraction of InMode’s solutions for the insurance companies is their lower cost of treatments. It makes sense that insurance companies would want to “encourage” patients to “try” non-surgical options first in an outpatient setting. If insurance would now be picking up the tab, doctors and clinics would be much more likely to benefit financially from having an InMode workstation as their customer base would increase and hence InMode would be a beneficiary with a boost to sales.

Can Inmode’s Technology be Developed Further?

It is clear that both the company’s ambitions and its technological capabilities extend far beyond just offering an alternative to plastic surgery. According to the CEO: “Whatever we can do with our minimally invasive technology, to take full operations from the hospitals, and bring it to the doctor’s clinics, this is the mission statement of the company.”

InMode currently has 9 workstations on its website and in the recent management presentation, they mentioned that there would be a soft launch of another one – called Envision - by the end of the year. Envision’s primary purpose would be ophthalmology. Envision would be the company’s 10th workstation so the business is diversifying and opening up new and attractive treatment markets at pace.

Deep Economic Moat Gives the InMode Business Enviable Longevity

InMode has two moats that I believe will continue to help the company deliver on its growth plans and defend its competitive position and margins from the competition. The first is the key intellectual property held by the company. The RF technology used by InMode is patented. The company has 7 patents (14 pending patents) to protect their position and totally dominate the gap between full plastic surgery and laser procedures. Customers increasingly choose this ‘middle way’ as procedures are far more effective than traditional laser but also don’t have the risks, high cost and invasiveness of plastic surgeries. Inmode’s superior technology has enabled it to build a trusted brand which underpins their wide economic moat and is reflected not just in their top-line growth but also in their very high margins. The second moat is the excellent management. CEO Moshe Mizrahy, CTO Dr. Michael Kreindel, Mr. Shakil Lakhani – President of North America, CMO Dr. Spero Theodorou and COO Alon Yaari COO all have the track record, credentials, determination, discipline, & vision that can truly turn this mid cap into a large blue-chip company.

Results Demonstrate That InModeis Uniquely Attractive



Source: Macrotrends.net
Figures refer to data between the 31st of December 2018 and the 31st of September 2021.

I believe Inmode’s consistently superior growth and profitability has been as a direct of their products’ technological superiority and brand recognition. I feel this type of margin coupled with consistent strong sales growth illustrate INMD’s superior product reputation and customer satisfaction in the market. The results announced by INMD just last week are nothing short of spectacular and far exceeded analyst expectations:

• Quarterly adjusted earnings of $1.02 per share for the quarter ended in June (versus mean expectation of five analysts for the quarter was for earnings of 87 cents per share).

• Revenue rose 183.8% to $87.33 million from a year ago; analysts expected $78.96 million.

• The fact that the mean earnings estimate of analysts had risen by about 52.8% in the last three months prior to these results makes the market beat even more impressive.

• We can see how unique the business really is by looking at the free cash flow: free Cash flow is 50% of revenues – that’s amazing even relative to the most profitable companies in the market (e.g. apple is at 27%, Microsoft 33% and medical device company Medtronic 18%)

• Another unique factor already mentioned is the unbelievably high 85% operating margins: very few companies have ever achieved this (though Palantir is pretty close)

The table below puts INMD’s incredible performance in the context of its medical device peer group:


Data Source: Seeking Alpha (2021)
Past performance is not indicative of future performance.

The US Market is still a Major Expansion Opportunity

According to Mizrahy, North America accounts for about 70% of its sales and is their most profitable market. INMD typically sells direct to doctors and offers services and disposables, with 15% of their income coming from disposables and services. This part of revenue is recurring from their large and growing installed base and with the US being their largest market, this revenue stream alone would lead to growth for the company in the years ahead. It is perhaps not appreciated by the market that physicians outside of the beauty industry do perform aesthetic procedures and there is a business opportunity for Inmode to offer this much larger and more diverse group its existing minimally invasive treatment solutions.

As we have discussed above, the company’s current success in cosmetic applications is just the tip of the iceberg. The expansion of their non-invasive techniques into women’s health, ophthalmology, ENT, urology, and several other markets demonstrates that INMD has the potential to be truly transformative for the company.

InMode’s International Expansion is Even Faster

The picture below shows the company’s current global organisation map. You can see they are very much already a global business with significant expansion opportunities in Latin America, Europe, and Africa. Therefore, as well as the other growth avenues mentioned above, I believe international expansion will mean the revenue growth of INMD will very likely accelerate into the foreseeable future.


Source: Slide from investor presentation (2021)

Currently, InMode operates on 6 continents. The most profitable one being North America in which InMode sells their products directly. Other markets are newer and even more fast growing: in Europe, Mizrahy says that Germany’s sales will grow by 50%, & 75% in the UK. In Korea, sales are growing at about 100% from the same period last year. InMode has established itself in emerging markets as well with about $5M in sales for India. Australia accounted for $1.7M in sales per quarter, even with the COVID lockdowns.

For the People’s Republic of China, sales equate to about $1.5M per quarter, or 6 million per year. It should be noted that only 3 workstations have been approved by China’s National Medical Products Administration commonly referred to as the CFDA. It should also be noted that InMode bought out the joint venture in China for better control of long term operations.

InMode Valuation Upside

I believe that InMode is attractively valued even if we just focus on their pretty assured growth potential in the aesthetic business. However, if you believe in the likelihood of InMode’s bipolar RF technology being increasingly used to treat other areas of health, the company is extremely undervalued. Given their strong balance sheet and profitability, they should also be able to fully support their expansion plans and achieve a material uplift in valuation. There is a fair tailwind too: as the economy opens up, people will increasingly consider non-essential surgeries that they were not able to do in the past year, and this trend will also positively contribute to INMD’s revenue/earnings.

Inmode’s current P/E sits at a fairly moderate 41x at the time writing. With a market cap of $5bn, Inmode shares are trading on a Price to Sales ratio of 17x. Cutera is InMode’s most similar competitor in terms of its current product offerings (though a lower quality business with lower profitability) and therefore Cutera’s valuation can be used for comparison. Cutera is trading on a PE of 121x and a price to sales of 5x (reflecting their lower profitability). Another comparator for the company could be blue chip large cap Align (makers of the famous Invisalign braces). With a market cap of $57bn, Align trades on a P/S of just under 17x, identical to InMode. However, Align’s P/E sits at about 82x. This higher valuation is perhaps a reflection of the fact that Align has been selling for much longer and has become a blue-chip stock over the last decade. Inmode is at an earlier stage of their growth so typically we could see the multiple the shares trade on expand towards Align’s as the company grows, giving us plenty of upside. There is an argument even to compare INMD’s valuation to Peloton (PTON). Consumers buy goods and services from both companies to look good, and both products will help you get there. Of course with PTON you’d have to do a lot of work to get there, but with INMD you wouldn’t! INMD has a market cap less than 25% of PTON’s, INMD is already very profitable and growing strongly while PTON is still losing money. In conclusion, taking all available comparators as a guide, it is clear that the valuation of Inmode is far from demanding.

In addition to the potential for multiple expansion, I feel the market isn’t pricing in the likely uplift to sales and earnings given that the company has a great moat, strong balance sheet, great management, and fantastic new growth avenues. Specifically, I feel the market is yet to appreciate that INMD is adding necessary health treatments to its portfolio in addition to its aesthetic treatments, and this has the potential to move the business away from being purely based on discretionary luxuries.

The business underwent a surprise two for one stock split two weeks ago. Although this has no impact on the operational basis or valuation of the business per se, stock splits are often followed by increased demand for the ‘cheaper’ looking shares.

Analysts are currently forecasting just 18% earnings growth for next year despite the very positive forward-looking statements from the management recently. From this low expectations base, I think it is very likely we will see earnings forecasts upgrades which can drive the share price higher.

INMD has an exceptional balance sheet. They have a pile of Cash ($332.9m), and negligible total debt ($3.8m). This cash gives the business plenty of options to increase shareholder returns: for example, they could buy up any attractive new technologies that are emerging or buy back their own shares to boost the company’s returns. As I explained in a previous post, when companies hold a lot of cash, the options available to them not only safeguards their future in times of uncertainty but in fact lowers the valuation we are buying the existing business on.

Looking at the valuation on a discounted cash flow basis reveals that there is between 19% and 67% upside in the shares.

InMode Risks

Although I think the risks are pretty low, as in every investment, they exist. Below is a list of what could go wrong:

  • Evidence may emerge of adverse side effects from the bipolar RF treatments. Currently, the immediate side effects seem small and temporary such as swelling and redness which go away in about a week. In terms of more serious side effects, the risk would be long term side effects emerging, decades after using the product.

  • During the Covid period, people have been travelling less so this factor may have flattered the growth rates this year with the result that the year on year growth next year may look more pedestrian (though this doesn’t diminish the long term growth picture)

  • A new and better technology may come along which is superior to Inmode’s (but as mentioned, Inmode’s strong cash position gives comfort on their ability to buy in any promising new entrants into their market)

  • Their product is a consumer discretionary, luxury item. Therefore, their revenue/earnings will trend with the general economic outlook and consumer’s disposable income level. However, as mentioned, it is in fact a much cheaper option than plastic surgery and moreover, the newer product lines are in the necessary treatment as opposed to the discretionary spending space.

  • Inmode has a patent infringement lawsuit with Cutera and the outcome may affect the “moat” of flagship product morpheus8.

  • Cutera is an inferior company in terms of margins but is continually growing market share of their like product in international markets specifically and may therefore become an obstacle to Inmode’s expansion plans.

  • The industry is very susceptible to competition & evolution of technology taking a 3-5 year view. Inmode will need to rely more and more on new products as Morpheus & Bodytite market share in the US matures.

Conclusion

Inmode is a high-quality high growth business which has consistently delivered eye watering margins and consistently fast growth rates (data sourced from Stockopedia):

• Five-year average YoY revenue growth of 72.50%, EBITDA growth of 338.00%, and EPS growth of 653.94% are jaw-dropping.

• Solid profitability metrics (EBIT margin at 44.16% and Operating margin of 85%)

• The market may well be underestimating their revenue growth potential from new product launches and international market expansion.

• The company probably has one of the strongest balance sheets I have ever seen, and their growing pile of cash can support their growth and protect them during an economic downturn.

• Management’s exemplary track record gives confidence that they will be able to maintain their strong financial performance going forward.

I believe INMD is well positioned to continue to grow within its very attractive vanity market sector and has a substantial economic moat to protect its position. From this solid base, the improving economic outlook coming out of the pandemic, launch of new products increasingly aimed at large new markets in necessary treatments, and international expansion will in my opinion continue to build on INMD’s amazing growth story.

This material is not investment research in accordance with the legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research; and as such is considered to be a marketing communication.

All investments have the potential for profit and loss and your capital may be at risk.

Past performance is not indicative of future performance.

The price may increase or decrease as a result of currency fluctuations.

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Thank you for this valuable information
This is the real beauty and health market, one of the best markets for investment

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