In 2021, it looked like medtech stocks couldn’t hurt. Shares of cosmetic sculpting device manufacturer InMode (NASDAQ: INMD) more than doubled as enthusiasm for all things new and medically related reached fever pitch.
InMode shares have fallen 72% since hitting a record high last November. High inflation, rising interest rates and fear of a recession are putting enormous pressure on the markets, and it looks like this stock has been downgraded a bit too far.
Reasons to buy InMode now
InMode markets minimally invasive cosmetic sculpting devices that use proprietary radio frequency (RF) technology. Cosmetic skincare providers from all over the world are making their way to InMode’s doorstep, and it may be a bigger market than most investors realize.
botox AbbVie (NYSE: ABBV) is not the same as a treatment with one of InMode’s devices, but it is a good indicator of the overall space of minimally invasive cosmetic alteration. Cosmetic Botox sales ended the first quarter at an annualized run rate of $2.6 billion.
Recently, InMode shared preliminary Q2 numbers that show strong adoption despite great economic uncertainty. The company expects second-quarter sales to be around $113 million, 30% higher than the company reported in 2021 and a whopping 268% gain over the same period. in 2020.
InMode’s sales aren’t skyrocketing because the company is donating its equipment. This well-run business generates solid profits. This year, adjusted operating income is expected to be approximately $201 million, or about 48% of this year’s total revenue estimate.
You might expect a highly profitable company that will most likely double in size over the next few years to trade at a higher valuation, but that’s not the case. You can now pick up shares of InMode for just 13.9 times earnings. For comparison, the average stock in the benchmark S&P500 the index is trading at 20.6 times earnings.
Reasons to be cautious
Although InMode is technically a healthcare stock, sales of cosmetic sculpting devices are probably not as resilient as sales of medical devices that Medicare, Medicaid and private insurers routinely buy for people whose lives depends on it. Sales of InMode’s products continued their strong ascent in the first half of 2022, but there is no guarantee that demand will remain strong if macroeconomic conditions deteriorate.
InMode operates a razor and blades business model with skin-contouring equipment that uses consumable needles that treatment centers must purchase from InMode. It’s a proven strategy, but revenue from consumables and services only accounted for 16% of total revenue in the first quarter. With capital goods sales accounting for more than four-fifths of total revenue, InMode’s cash flow may not be as predictable as cautious investors would like.
A purchase now?
According to the Bureau of Labor Statistics, consumer prices rose 9.1% in June. One of the best ways to fight soaring inflation is to invest in companies with pricing power.
Options for minimally invasive skin toning and firming services are extremely limited. With a patent-protected system that only InMode can sell, this company has a level of pricing power that most others can only dream of. This advantage and an attractive valuation make InMode a great stock to buy now and hold for the long term.
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Cory Renauer has no position in the stocks mentioned. The Motley Fool has posts and recommends InMode. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.