InMode - INMD

Non-Invasive & Minimally Invasive Medical Devices

InMode, an Israeli-based non-invasive medical device company, has made its mark in the United States, where its stock (INMD) is listed and where it holds its largest market share. The company's portfolio of light-based aesthetic treatments, spanning plastic surgery, gynecology, dermatology, otolaryngology, and ophthalmology, encompasses a wide range of procedures, including laser hair removal, skin tightening, and body contouring. InMode's devices are sought-after by plastic surgeons and aesthetic practitioners who offer these transformative treatments.

Most aesthetic light-based medical device manufacturers offer a traditional model of selling "boxes" and "consumables." A box refers to the machine that generates the laser for the treatment, while consumables are necessary components that require regular replacement for optimal performance. Typically, a combination of a box and consumables can only perform a single type of treatment. However, InMode has introduced a revolutionary approach that breaks away from this convention. Their innovative technology allows a single box to perform multiple treatments by simply switching handpieces. This breakthrough enables practitioners to expand their service offerings without incurring the substantial costs associated with purchasing additional machines. The flexibility and cost-effectiveness of InMode's handpiece system have made it a game-changer in the aesthetic medical device industry.

Medical aesthetics stands out as the most rapidly expanding segment within the healthcare industry, fueled by a surging demand for laser and non-invasive treatments. This heightened demand stems from several factors, including the affordability, low risk profile, rapid treatment outcomes, and abbreviated recovery periods associated with these procedures. The influence of social media and prominent figures has played a crucial role in dispelling stigmas and normalizing aesthetic treatments, particularly among younger generations. InMode's groundbreaking technology has garnered significant appeal among both patients and physicians due to its unique capabilities that enable procedures to be performed within the comfort of a doctor's office, eliminating the need for a surgical setting, anesthesia, or any other invasive measures.

The confluence of favorable factors, including the pandemic-driven surge in demand for non-invasive aesthetic treatments and InMode's ability to double its revenues during this period, propelled the company's share price to unprecedented heights. While the stock's valuation, reaching a staggering 40 times earnings, undoubtedly appeared excessive, it has since experienced a significant correction, trading at around 10 times earnings, a far cry from its peak. This decline can be attributed to a confluence of events, including the ongoing war in Gaza, the resulting economic uncertainty, and InMode's first-ever reported revenue slowdown. However, the recent 15% surge in the stock price following the company's earnings report suggests that the market may be overreacting to these temporary headwinds. This presents a compelling opportunity for investors to capitalize on InMode's long-term potential.

The internet is flooded with opinions on InMode, ranging from overly enthusiastic endorsements to dire warnings. This report aims to provide a balanced perspective, highlighting both the company's strengths and potential risks. We believe that InMode is a promising company with a strong track record of innovation and growth, but we also recognize the challenges and risks it faces. By examining both sides of the story, we hope to empower you to make an informed investment decision.

InMode boasts exceptional financial performance, consistently delivering stellar margins. Over the past five years, their average gross margin stands at 85%, while their operating margin and returns on equity and invested capital hover around 35%. The company's balance sheet reflects robust financial health, with over $670 million in cash reserves, representing close to 40% of its market capitalization. Notably, InMode operates debt-free. Despite these impressive financial metrics, InMode faces several concerns and risks that warrant careful consideration. This analysis will delve into these aspects to provide a comprehensive assessment of the investment's potential and drawbacks.

The medical device industry is fiercely competitive, but InMode has carved out a strong competitive advantage through its unique handpiece upgrade strategy. By offering these upgrades to existing device owners, InMode effectively locks them into its ecosystem while simultaneously generating additional revenue streams. The company's technology is protected by a robust patent portfolio, further solidifying its position. InMode boasts impressive operational efficiency, delivering its products within 10 days. Despite the recent Israel-Gaza conflict, the company has secured inventories sufficient to meet demand for the next three quarters. InMode's products have garnered endorsements from high-profile celebrities, including the Kardashians, and have proven to be highly effective in enhancing one's appearance, making them more "Instagrammable." While we may not personally engage in these procedures, we recognize the lucrative opportunity presented by InMode's business model, particularly given its current valuation of 10 times earnings. We are confident that the demand for aesthetic treatments will continue to grow, and we are willing to capitalize on this trend.

The surge in popularity of Ozempic-like drugs presents an additional growth opportunity for InMode, as was alluded to in their recent earnings call. While the impact may not be immediate, it is conceivable that there will be a rise in demand for skin-tightening procedures as individuals experience significant weight loss. InMode is strategically positioned to capitalize on this trend, given its comprehensive portfolio of aesthetic treatments and its established reputation in the industry.

While InMode's financial performance and growth prospects are impressive, it is crucial to acknowledge the potential concerns raised in a short seller's report published on March 4, 2020. The report contends that InMode's success is primarily attributed to its marketing strategy, which heavily emphasizes the safety of its aesthetic devices. Despite the company's soaring stock price since its initial public offering, the report alleges that InMode has concealed adverse events, including undisclosed lawsuits, apparent out-of-court settlements, and online reviews detailing patient experiences with severe burns, permanent scarring, and nerve damage following treatments with InMode products. Furthermore, the report raises concerns about potential misleading communications to patients regarding the safety of these devices. The report also highlights the CEO's previous involvement with similar narrative-driven marketing practices in another company, casting doubt on the transparency and trustworthiness of InMode's product claims. These allegations warrant careful consideration and thorough investigation to fully assess their validity and potential impact on the company's future performance.

The short seller's report raises significant concerns about InMode's business practices, particularly the allegations of undisclosed adverse events and potential misleading communications to patients. While it is important to acknowledge these allegations and conduct thorough investigations, it is equally important to avoid jumping to conclusions without concrete evidence. The possibility that InMode engaged in fraudulent practices cannot be entirely dismissed, but it is also conceivable that the report's claims are exaggerated or inaccurate. The truth likely lies somewhere in between these two extremes. It is unlikely that InMode's management is entirely flawless or devoid of any questionable actions, but it is also improbable that their products are nothing but a scam.

The potential for market saturation poses a significant risk to InMode's growth prospects. Given their equipment sales-driven business model, the market's potential saturation could have a substantial impact on their revenue growth and profitability. The "Stay Away" review on Glassdoor from August 23, 2023, suggests that territories may be oversaturated, leading to increased competition between sales representatives for a limited pool of potential customers. While this anecdotal evidence is based on a single review from Colorado, it aligns with the recent slowdown in InMode's revenue growth, raising concerns that the company may have reached its peak sales. A critical question to consider is whether the decline in sales will be abrupt or gradual.

The allegations raised in the short seller's report cast doubt on the ethical conduct of InMode's management. The report claims that the company has denied receiving complaints about adverse events related to their products, despite evidence suggesting that at least 11 patients have suffered severe injuries. While the number of reported adverse events may seem tiny compared to the hundreds of thousands of procedures performed, the severity of the alleged injuries raises concerns about InMode's commitment to patient safety. The company's denial of these allegations further undermines trust in its management's transparency and integrity.

InMode has faced criticism in employee reviews on Glassdoor, with several individuals alleging excessive micromanagement and a poor work-life balance. Some reviewers have even questioned the authenticity of positive reviews, suggesting potential manipulation.

An article highlights allegations concerning InMode, which suggests that the company fails to adequately inform doctors about the additional licensing requirements required to operate their devices. This omission has led to issues for physicians who have committed to high monthly payments for equipment they cannot use. Furthermore, former employees have come forward with claims that the company promotes unrealistic earnings potential, omits crucial information regarding legal compliance, and frequently relies on high-interest loans for sales.

During the most recent earnings call, the CEO made a noteworthy statement, indicating that the company would not pursue buybacks, despite having substantial cash reserves and a declining share price. As part of his argument, he referenced a competitor who experienced a drop in their share price following a buyback. This declaration has raised concerns among many critics, who perceive it as a significant red flag. Traditionally, buybacks are not solely aimed at supporting the share price but are intended to create value for shareholders. On the contrary, some argue that buybacks within the industry's historical context have not yielded significant benefits and have potentially stifled innovation.

This situation prompts a fundamental question: why does the company maintain substantial cash reserves on its balance sheet without deploying it for purposes such as reinvestment, acquisitions, buybacks, or dividends? This inaction raises concerns about the transparency and intentions of the management, particularly in light of their questionable track record.

Following the release of the short seller's report, INMD's stock price dropped from $16.50, reaching its lowest point at $6.50. This drop occurred during the height of the COVID-19 pandemic, creating another significant challenge for the share price. However, the stock began a gradual recovery from that point and reached an astonishing peak of $96.21 in October 2021, reflecting a valuation that was 15 times higher than the earlier low point.

This surge was accompanied by reports of the company's management selling shares. It's worth noting that the management's ownership stake, which once stood at around 35% of the company's shares, has dwindled to approximately 7%. This significant reduction in ownership raises concerns and suggests that they may have taken the company public primarily to cash out. This decision seems puzzling considering the firm's high profitability and low capital requirements, which would have allowed it to thrive without going public.

As INMD's stock price climbed in tandem with favorable market conditions throughout 2021, it followed a similar trajectory in declining during the same 2022-2023 period. For the better part of 2022 and 2023, it traded within the range of $20 to $40. However, a recent upheaval coincided with a series of events related to InMode. First, the outbreak of the Israel-Gaza conflict, followed by the company reporting its first quarterly year-over-year decline. This tumultuous period led to a 50% decrease in the share price. The stock rebounded by 15% in a single day following an earnings report, even though the revenue and net income figures were 10% and 17% lower, respectively, compared to the previous quarter. The management attributed this slowdown to several factors, including the impact of rising interest rates, which raised the cost of financing equipment for doctors (approximately 15-20%). Additionally, the seasonality of the business played a role, with Q3 being the weakest due to the reduced demand for procedures during the summer months when patients prefer not to be exposed to the sun. Despite these challenges, the company maintained strong guidance for the year, only modestly revising it downward by 6% from the initial projections.

Considering the current stock prices, InMode might be an attractive option for a small position. However, the presence of numerous red flags on theradar discourages us from making it a major holding. Our conservative valuation suggests that the stock could potentially reach the $50 range within the next couple of years if the multiple stabilizes, and the company continues to demonstrate positive results. Yet, it's unlikely that we'll witness a return to its all-time high, especially in the current market conditions.

We initiated a small position in May of last year when the stock was trading below $25. It performed exceptionally well, reaching a peak above $40. With nothing within the business substantially changed, the external factors have dictated the decline of the share price. When this downturn unfolded, we made the decision to double down on our investment, transitioning it from a tiny position to a small one. We are willing to accept the associated risks but remain cautious about allocating a substantial portion of our portfolio to this stock.

We trust that you find this write-up informative and insightful. We welcome any input regarding potential downsides or any aspects we might have overlooked in our analysis of InMode. It's important to emphasize that this report should serve as a valuable starting point for your research and investment decision-making process. InMode is a topic that has been widely covered, and there are numerous resources available online for further exploration. We encourage you to delve deeper, seek additional perspectives, and conduct your own thorough due diligence before making any investment decisions. Your financial well-being is of utmost importance, and we wish you success in your investment endeavors.