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InMode (NASDAQ:INMD) stock has been performing horribly in the past three years. Once a $99 stock near the top in 2021, INMD now sits at under $16/share. But is there more damage ahead, or has the bottom been hit? Personally, we believe that there’s much more upside than downside potential ahead, especially since its problems seem short-term in nature. It may even be considered an inverse bubble, given how low the valuation has gotten. On top of that, it’s still profitable, is buying back shares, and can benefit greatly from interest rate cuts. As a result, we rate the stock as a Strong Buy.
A Quick Overview Of InMode’s Business Model
As a refresher, let’s give a quick overview of the company. Based in Israel, InMode sells medical devices and consumables for these devices, while also offering maintenance services. In particular, the devices it sells use radiofrequency technology or intense pulsed light technology, which are used for aesthetic procedures such as skin tightening, facial rejuvenation, and body contouring.
Its customers are medical professionals such as dermatologists and aesthetic practitioners. However, InMode’s devices are quite expensive, given their high quality, so the company’s customers often finance the equipment, which is why interest rates play such a major role in the firm’s ability to generate revenue.
What Happened To InMode Stock?
InMode used to be such a promising stock — until it wasn’t. Unfortunately, there was a perfect storm of events that led to the stock’s downfall. As the stock started to fall in late 2021 up until mid-2022, investors were expecting InMode to buy back shares, especially since it had (and still has) such a large cash position ($729.2 million as of June 30, 2024, although this figure is likely a bit lower now due to the remainder of the buyback being completed in July) with no debt. However, these buybacks never came, which was a problem for investors.
But this wasn’t necessarily a huge problem at the time because the company’s financial results were still decent. For instance, for the quarter ended June 30, 2022, INMD’s revenue grew by 30%.
The real issues started showing up in 2023. Specifically, on October 12, 2023, INMD stock finished about 20% lower after the company lowered its guidance for the full year (high interest rates negatively affected demand). Up until then, InMode was known for beating estimates, and the company often had beat-and-raise quarters in previous years. This marked a stark change and threw many investors off.
Since then, though, there have been more guidance cuts (including in the most recent earnings report), and that’s what investors have been accustomed to now.
With InMode refusing to buy back shares up until recently, the stock became “broken.” Essentially, it became a company with declining revenue and earnings that wasn’t using its capital effectively.
There’s also the unpredictable nature of the war involving Israel, which has certainly added to the drawdown. But now, the future looks brighter for InMode stock, specifically because of the expectation of lower interest rates, the low valuation, and that it’s now on board with buybacks.
Also, while the war is still ongoing and presents a risk, one can argue that it may actually be better to invest in Israeli stocks when there are conflicts, as it adds future upside potential for when the conflicts are (hopefully) resolved.
Lower Interest Rates Are A Catalyst For InMode Stock
As stated above, high interest rates greatly impact InMode’s financials because of its expensive products that often get financed. For reference, an InMode device can cost $120,000. Especially with the expectation of lower rates, we would assume that many of InMode’s customers are waiting for rates to come down before going ahead with a purchase.
In fact, in the most recent earnings call, InMode’s CEO, Moshe Mizrahy, stated, “We’re still waiting to see the interest rate go down on lease packages that will enable doctors openly to buy more systems and not wait.”
This is causing short-term pain for the company but is setting them up for long-term gains when rates fall. After all, it’s not as if the aesthetics market has suddenly lost relevance. In the age of social media, a great number of people want to look as “aesthetic” as possible. And with celebrities like Kim Kardashian and Sydney Sweeney being treated with InMode’s devices, there’s clearly some merit to the company’s products.
Back to interest rates. According to the CME FedWatch Tool, the market is pricing in a 68% chance of a 25 basis points interest rate cut to 500-525 basis points and a 32% chance of a 50 basis points cut at the September 18 Fed meeting. By March 19, 2025, the market is pricing in a 42.3% possibility of the interest rate range being at 375-400 basis points and finally, by December 10, 2025, the market expects a 26.6% chance of a 300-325 basis points range and a 24.4% chance for 325-350 basis points.
Essentially, while these are just estimates, there’s a decent chance that interest rates can fall by about two percentage points from now until December 2025. For anyone who has ever financed something, you know that two percentage points can make a big difference, and this should easily help InMode get back on track to positive revenue growth.
The Valuation Is Pricing In Too Much Of A Decline
InMode stock’s valuation has become a bit absurd, in our view, even with all of the headwinds the company has been facing. Although earnings are expected to fall for the full year, analysts still expect the company to report $1.88 in EPS for Fiscal 2024, which gives it a forward P/E of 8.35x (see below). This translates to an earnings yield of 11.98%. Looking ahead, EPS is expected to increase by 14.1% in 2025 and 8.9% in 2026, bringing its 2026 forward P/E to 6.7x (a 14.92% earnings yield).
We believe these estimates to be reasonable based on the interest rate catalyst mentioned above, not to mention the potential for more buybacks in the future (more on that below).
Another way we can see how low its valuation has gotten is through our reverse DCF calculator that we’ve created.
Essentially, it calculates an implied growth rate that the market is expecting, and then we decide if the stock can exceed that implied growth rate (which would make it undervalued) or not (which would make it overvalued). A more comprehensive guide can be found here.
Below are the inputs for the calculator:
- FCF per share (taken from Finbox): $1.99
- Cost of equity (also taken from Finbox, which calculates it using the CAPM model): 10.8%
- Terminal growth rate: 3%
- Share price: $15.65
We used a 3% terminal growth rate for a few reasons. First, global GDP growth is estimated at around 3% for the next few years, and that seems like a reasonable growth rate in perpetuity. Furthermore, if we assume the Fed’s 2% inflation rate goal is achieved, InMode’s competitive advantage could allow it to at least raise prices that slightly outpace inflation.
Looking at the screenshot below, we can see that the market is currently pricing in that INMD will see its FCF per share decline by 4.412% per year for the next 10 years and then grow 3% per year after that in perpetuity. If you ask us, that seems incredibly pessimistic for a top player in the growing aesthetics medical device market.
InMode Is Finally Buying Back Shares
InMode recently bought back 8.37 million shares — 10% of its outstanding shares — at an average price of $17.97 for $150 million. Although this hasn’t helped the share price go up, this is undoubtedly a positive development. At its current valuation, buybacks should be highly accretive to earnings per share.
The good thing is that the company is looking to do more buybacks in the near future. The bad news is that InMode needs approval from the Israeli IRS in order to do so without paying taxes.
In the conference call, INMD’s CEO stated the following:
On your second question, we did a buyback of 8.37 million shares, which is exactly 10% of the total outstanding shares that we had. Why is it 10%? Because of some tax issues. If we do more than 10%, we’ll have to pay, according to the Israeli IRS, we’ll have to pay dividend tax. They allow us to do, and hopefully they will allow us to continue but we ask for a pre-ruling from the Israeli IRS, and they allow us to do 8.37 million shares, which is about 10% of the total shares. And if we will decide in the future to continue with buyback, all the options are on the table right now. We will ask again, and hopefully it will be approved so we can do some more in addition to the 8.37 million shares.
We can only hope, as investors, that the Israeli IRS allows the company to buy back more shares without triggering dividend tax payments. Nonetheless, even if this doesn’t happen, InMode stock still looks undervalued. Plus, its cash pile can be used for acquisitions, dividends, or it can continue to generate interest income, although those three options may not be as useful as buybacks.
The Takeaway
InMode has tumbled in recent years, but the stock is now trading at a valuation that suggests FCF per share growth of negative 4.412% for the next 10 years and has a forward earnings yield of nearly 15% for 2026. While the war involving Israel is unpredictable, InMode is still profitable, has plenty of cash on hand, and will benefit from lower interest rates in the future, potential buybacks, and a growing aesthetics market.
Therefore, we think it’s important to take a longer-term approach with InMode stock. It’s hard to see this stock being lower than its current price in the next few years — unless the war escalates to a great extent.
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