InMode (INMD -2.06%) is a growth stock unlike any other, and it’s also one of my biggest holdings. This medical aesthetics company hails from Israel, and it makes technologies that enable minimally invasive beauty treatments, ranging from skin tightening to body contouring. That means it stands to steal market share from traditional, non-invasive beauty techniques like laser treatments as well as invasive approaches like plastic surgery.
Its shares are up some 50% over the past six months. But was the business a good investment a couple of years ago, and could it still be a good investment from here? The answer to both of those questions is yes, and here’s why.
This growth stock delivered massive returns
Investing in InMode in early 2020 was a smart move. If you bought $5,000 worth of its shares on Jan. 1, 2020, they’d now be worth around $9,400. But that’s assuming you didn’t sell your shares after the stock’s sharp run-up in late 2021. If you’d sold near the peak, you’d now have more than $24,000.
Now, with its valuation at a more reasonable level and with less liquidity in the financial markets thanks to rising interest rates, the question is whether it can deliver good returns for new and existing shareholders moving forward.
One thing is certain: InMode probably can’t grow its earnings or sales as rapidly as it has over the last few years. Look at this chart:
INMD Revenue (TTM) data by YCharts
As you can see, while its trailing-12-month net income is still rising, it’s also decelerating. But don’t take that to mean its margins are compressing. In fact, compared to five years ago, the company’s cost of goods sold (COGS) and total expenses have fallen as a percentage of its quarterly revenue, and its profit margin actually widened.
To accomplish this achievement, InMode commercialized a handful of devices as well as applicators or attachments to use in conjunction with its workstations. Each workstation is specialized for a specific purpose, such as non-invasive skin tightening of the face in the case of its Evoke unit. Another unit, the Diolaze XL, is used for hair removal.
The point is that customers can establish a relationship with InMode when they buy their first unit and then continue to be a source of revenue as they purchase maintenance services, new attachments, and replacement parts for their hardware. That makes its long-term prospects quite appealing as the company should have plenty of opportunities to profit from its growing product ecosystem.
Is the growth slowdown a problem?
It likely doesn’t matter much that InMode’s growth recently slowed down a bit, and here’s why.
In 2021, the company only spent around $9.5 million on research and development (R&D) against $357.5 million in total revenue, and in 2020 it spent a similar sum. That was enough to launch two new workstations in 2021. And from 2010 to 2021, it launched 10 new platforms. In other words, InMode’s R&D engine has a long-term track record of successfully creating innovative products that the medical aesthetics market is happy to adopt — all for relatively small R&D spending.
Further, it plans to open subsidiaries to sell its hardware in Asia and Europe by the middle of next year. That should enable it to find new sources of customers and revenue growth. But don’t be surprised if the expense of running a global business causes margins to compress slightly as earnings ramp up.
As the next few years unfold, expect the business to keep launching more platforms and generating more sales from recurring sources like replacement parts and from newly developed products. All the while, its devices should continue to have an edge compared to more invasive substitutes like plastic surgery. Beauty treatments delivered via quick outpatient appointments tend to find easier acceptance from patients.
Perhaps the biggest risk to investors who buy InMode stock today is potential competition from other companies offering aesthetic treatments. Management cites such companies as AbbVie subsidiary Allergan, which makes Botox, as contestants for its market. Still, this is a growing field that should be able to accommodate various approaches.
With that in mind, this stock is an attractive one for investors looking for growth at a moderate amount of risk. Just don’t expect the returns to be exactly the same as the first few years after its debut as a public company.
