May 17, 2021
[7 min Read]
Founded in 2008 in Israel, InMode is a global innovative leader that develops, manufactures, markets minimally-invasive and hands-free aesthetic medical products for various procedures. Since its IPO in 2019, InMode has expanded offerings of product platforms, handpieces, consumables, warranties to 50 countries through its direct sales team and third-party distributors. Their product portfolio consists of broad radiofrequency (RF) proprietary technology offered to over 200,000 physicians globally. During the pandemic, they generated an 85% Gross Margin on Revenues of $206.1M in 2020. Their robust business model saw Net Income rise at 194.3% CAGR (2016-2020), P/E at 36.3x, and Total Debt/Capital at 0% while industry peers struggled at -29.4%, -5.18x, 7.51% respectively. InMode's sustainable competitive advantages- experienced management team, clinical portfolio (FDA, publications), innovative offerings, and powerful brand positioning- strongly differentiates them from peers and provides future growth opportunities.
Medical Aesthetics Market Overview:
The global medical aesthetics market is projected to reach $US 15.9 billion by 2025 from $US 9.4 billion in 2020 at a CAGR of 10.9%. The growing usage of minimally invasive and noninvasive aesthetic procedures, raising public awareness about cosmetic products, the availability of technologically advanced methods, and the increasing demand for aesthetic treatments among males are the key factors driving the huge growth potential of this market. On the other hand, market growth involves certain risks, such as clinical risks, complications associated with medical aesthetic procedures, and the increasing availability and adoption of alternative beauty and cosmetic products. The global medical aesthetics market appears to be competitive and fragmented with various well-established rivals, such as Solta Medical, Inc., Syneron Medical Ltd, Cutera, and Lumenis, driving the market competition. However, they mainly offer limited results-oriented multiple treatments in the form of traditional laser-based aesthetics. By contrast, Inmode can differentiate itself from the competitors by leveraging its minimally-invasive and non-invasive aesthetic surgeries.
Favourable Industry Trends and Opportunities for InMode
Within the global medical aesthetics market, we've identified four major ongoing industry tailwinds to drive the future growth of InMode. Firstly, the market favours all-in-one solution, compared with the previous one-time-one-solution type. InMode's procedures such as EVOLVE allow for multiple treatments simultaneously. Secondly, consumers are shifting their focus towards minimal skin invasion and quick recovery from traditional surgical procedures. The non-invasive treatment market size has grown at a CAGR of 11% from 2014 to 2021. Therefore, medical device players, which services are oriented on these characteristics, will capture a considerable amount of market share. The third trend is the reinvention and repositioning in the niche market. This requires companies to continually renovate their technology and tailor to the digitalization to remain competitive. InMode is constantly developing its product lines with scalable technologies, which will help the company sustain in the long term. Last but not least, the emerging market's growth creates opportunities for InMode to expand its business. From 2019 to 2020, according to InMode's revenue distribution, we can infer that it sees the growth potential and is increasing its sales in areas outside of the US.
Thesis 1: Unique Positioning Targets Treatment Gap with Differentiable Solutions
Evoke and Evolve are the core and high growth products of InMode, being in a unique and sustainable position in the market. Specifically, Evoke introduced non-invasive, hands-free, and programmable technology, making it an efficient social distancing treatment through reducing patient- physician face-to-face contact during the process. Additionally, Evolve is an innovative hands-free solution maximizing patient outcomes and provides a high quality of aesthetic treatments. This all-in-one platform delivers various technologies to remodel skin, target adipose tissue, and tone muscles to maximize physician and clinician time. Moreover, InMode developed its core solutions, including minimally-invasive surgical aesthetic and non-invasive solutions. For instance, minimally-invasive solutions can reduce patient downtime, discomfort, other potential complications, and costs. Additionally, differentiated and RF energy-based technology can simultaneously kill fat and tighten skin, overcoming the weaknesses of traditional surgical aesthetic procedures. Overall, InMode's key innovations have allowed the company to emphasize unmet patient needs and expand the addressable patient population for aesthetic solutions leading the paradigm shift in the medical aesthetics market.
Thesis 2: Reliable Company Ownership and Financial Foundations Provide Strong Base
InMode has a strong ownership base with over one third from its management team. Such structure aligns the management's interests well with the shareholders' interests. Furthermore, as the company has over 40% of ownership from strategic stakeholders, the company is likely to have clearer direction and more effective operating plans in the long term, compared with its peers.
Besides management team's ownership, InMode is owned by a large percentage of institutional investors and can incentivize individual investors and serve as a driver for organic growth in the long run. Taking a look at the ownership, we found that top 25 shareholders own 57.3% of the company, which gives InMode high authority and influence over the long term development of the firm. Large institutional ownership also entitled InMode with a high degree of credibility in the investment community. In addition, InMode has a strong balance sheet position with high liquidity and profitability. InMode has a lowered leverage, and this positions InMode to gain further access to growth capital and provides downside protection.
Based on our analysis of the company's key financial ratios and balance sheet strength, we believe that InMode's performance indicates a promising outlook with high profitability, high efficiency and low leverage.
Thesis 3: InMode's Significant Cost Advantages Allow for a High Return of 438.69%
InMode has significant cost advantages that increase their bottom line. First, they have low CAPEX as they mainly outsource manufacturing to third-party subcontractors in Israel with long-term agreements in place that control procurement, quality assurance, and costs/units for forecasts. As well, low R&D costs are effectively in place due to the scalable nature of their products platforms. Lastly, InMode currently benefits from low taxes in Israel under their Benefited Entreprise Status which makes them tax exempt until 2021 with possible extensions from the government.
Risks & Catalysts
We've assessed the company's risks from three perspectives: competition, fluctuation and relationship management.(ranking from the greatest to the least impact) More and more companies are competing within the niche market and the medical aseastic market is characterized by rapid innovation. The inability to develop dynamically will lead to a shrink of market share. Additionally, The company now has a high operating margin. There could be a potential risk that InMode will not maintain its operating margin. Since its quarterly expenditure, inventory and production depend on the expected order numbers, there could be fluctuation in financial results from quarter to quarter. Moreover, failing to maintain the working relationship with clinics and healthcare professionals might result in insufficient development and marketing of products in line with these customers.
The company has set up two fully-owned sales and marketing subsidiaries in early October 2019, in India and Australia, respectively, as part of its global expansion strategy. On the regulatory front, InMode also received Health Canada Certification for multiple new products in October 2019, which further expanded its presence in Canada. The certification included two clinically proven technologies, Morpheus8 and AccuTite, having been widely recognized as the preferred choice of aesthetic solutions by physicians. We anticipate the company's Canadian operations to positively and sustainably impact its business growth.
Moreover, InMode has 7 patents and 14 pending patents. Based on our historical stock performance analysis, many of the spikes in the price chart were boosted from InMode's announcement of new products or approvals. Once one or more patents are approved, the company will strengthen its market influence and increase shareholders' confidence in investing in the stock. Therefore, the share price will have significant momentum to move up.
Based on the DCF analysis and the DCF sensitivity analysis, we predict that the company's capitalization has a significant growth potential. Comparing its fair value to its current stock price, InMode is undervalued by the market by a total of 12-28%.
Judging by the data of the last three years, the revenue is forecasted to increase at a declining ratio with the expansion of its products and the growing market being the main drivers. A projected growth rate is between 13%-22% with a steady perpetual growth rate at 5%. CapEx and D&A remain on par with historical value with a slight increase because of scale effects. Tax rate calculated as a percentage of the historical 5-year average at 14%. EV/EBITDA is Calculated using the industrial average of 23x.
Comparable Company Analysis
We derive a share price of $94.13 from the comparable company analysis, with the weight of EV/Revenue and P/E multiples as 2:1. InModes is 2.5x larger than other players in the niche market, so we include a set of comps with relatively larger cap companies. We classify the peer companies by the market cap and these peers are screened based on their similarities (business model, capital structure, consumer landscape, revenue growth and more) to InMode. Since many of the companies' EBITDA are below zero, we mainly use the EV/EBITDA multiple for comparison, not for valuation. InMode has a EV/Revenue of 9.6x, lower than the benchmark of 11.8x. The company's P/E of 33.6x is also below the peer group's P/E of 49.4x. Therefore, given the outstanding performance and profitability of the company, we conclude that InMode is currently undervalued according to the benchmarks.
We assign the ratio of 7:3 to DCF analysis and Comps, as many of InMode's direct competitors are privately owned. In summary, combining DCF and Comps, we derive a target price of $89.83 with 35% DCF(perpetuity growth), 35% DCF(exit multiple), 20% Comps(EV/Revenue) and 10% Comps(P/E). Our valuation methodologies give a total return of 25.97%. Therefore, we initiate a buy rating.