The stock market continues to suffer from a bad year. The Nasdaq Composite index has collapsed by 33% this year.
All growth stocks have been hit hard lately but not all of them have deserved it. InMode (INMD) was a high-flying stock in 2021 but has seen its value drop 65.8%.
Why it's down
InMode's earnings growth was slower than revenue. InMode increased its spending on marketing and sales, which caused net income growth to slow.
| METRIC | Q3 2021 | Q3 2022 | CHANGE |
|---|---|---|---|
| Revenue | $94.2 million | $121.2 million | 29% |
| Net income (GAAP) | $44.7 million | $48.8 million | 9% |
| Adjusted Income (Non-GAAP) | $47.9 million | $56.6 million | 18% |
Investors are concerned about the possibility of a slowdown in economic growth due to soaring interest rates. But these macroeconomic worries seem exaggerated given the company's strong position in the lucrative aesthetics market.
A great bargain
InMode's stock may have gotten ahead of its self in 2021 but the losses it has suffered this year are too severe. The stock is now available for just 14.6 times the management's 2022 adjusted earnings estimates.
The average S&P500 stock trades at 16.9x forward earnings expectations. InMode's growth potential is far greater than that of the benchmark index, as you'll soon see.
InMode sells patent-protected, non-invasive devices that can be used for body shaping, fat reduction and skin tightening. One of its lead products, Morpheus8, is a radio-frequency-powered device that can tighten jawlines and remove wrinkles by remodeling adipose tissue that lies just below the skin surface.
Management told investors earlier this year that the company would sell 30,000,000 units of EmpowerRF by 2022. This workstation also includes the Morpheus8 device. In October, sales had already exceeded 30 million units.
The razor-and-blade model
Although workstation sales are soaring, this is not how InMode plans to increase its profits over the next few years. The company's installation base will grow, as will the sales of consumables and services that are needed to be replaced after each procedure.
InMode's razor-and-blade business model proved to be a success in the third quarter. InMode's platforms are being used more often, driving 53% greater revenue in the third quarter from services and consumables year-over-year.
The company's service and consumable segments, which have a higher margin, account for around 12% of its total revenue. Intuitive Surgery and its robotic assisted surgical systems will give you a better idea of InMode's future. Although it took time, sales of consumables, accessories and services now account for 73% of Intuitive's total revenue.
Intuitive Surgical has made huge profits over the past 20 years due to its steady growth in services and consumables sales. These huge profits led to stock prices that were unimaginable. A $10,000 investment in Intuitive Surgical 20-years ago is now worth approximately $1.3 million.
InMode cannot guarantee that it will do the same in the next 20 years. However, the company is following a similar path.
InMode's valuation suggests that it is on a growth path of a single-digit percentage, despite being on a path to becoming a millionaire from everyday Intuitive Surgery investors. It is a smart decision to add at least a few shares of this stock in your portfolio, given its recent price.
Originally published on Fool.com
Cory Renauer has positions in InMode Ltd. The Motley Fool has positions in and recommends InMode Ltd. and Intuitive Surgical. The Motley Fool has a disclosure policy.