InMode seeks to fill a “treatment gap” which comprises of patients who are

• in the age range of 35-60 years old
• looking for comparable results to plastic surgery, but without the shortcomings of full surgery (downtime and scars)
• large population of patients whose skin is not responsive to other procedures
• affordable, office-based, out-patient procedure

The industry in which InMode operates in is expected to reach USD$141 billion by 2028, representing a CAGR of 14.7% over that period. Today, North America is the dominant regional market, accounting for 37%. However, Asia Pacific is expected to register the fastest CAGR on account of rising target population.

As mentioned before, lower cost, shorter downtime and reduced side effects compared to traditional means help bolster demand for minimally-invasive procedures.

As you can see, InMode’s platforms can be categorised into three main types: Minimally Invasive, Non-Invasive and Hands-Free.

Additionally, their products are capable of doing a wide variety of procedures and they have more than one solution for each procedure. This increases consumer choice and caters to their various needs.

InMode’s products have three main components:

1. Platforms – Includes user interface with touch screen
2. Handpieces and Hands-free applicators – The mode of application of energy over treatment area
3. Proprietary Software – manages proper system performance and capable of automatic temperature control, system calibration and detection of any malfunction. This allows the practitioner to focus on the treatment as the system is automatically managed by the software.

As of 2020, most of InMode’s revenue is generated from the US market. However, growth in revenue from the international market outstrips that of the US market. This is evident by the rising proportion of revenue coming from the international market.

InMode has a very established distribution network spanning worldwide. They are thus poised to tap on international growth, particularly in Asia, which is expected to see the greatest rise in demand for such procedures.

I won’t bore you with numbers so I will just bring your focus to a few key points. However, you are encourage to analyse deeper if you wish to.

As a small company with market cap of USD$4 billion, InMode has demonstrated robust profitability that leave most growth companies in envy. Despite a lackluster second quarter in 2020 due to the Covid-19 Pandemic, InMode quickly recovered and achieved 32% growth in revenue from 2019 to 2020. This is a testament to the resilience of their business and adaptability of their management and staff.

The largest expense for InMode by far is sales and marketing. I expect this to continue to rise in the future as InMode expands their distribution network. This is their main method to drive sales growth and I would be happy to see them spending more in this area if it results in sustained revenue growth.

Lastly, InMode has consistently high gross profit margins (84-86%) and operating margins (35-38%). This indicates the presence of some form of economic moat that allows InMode to earn supernormal profits.

InMode’s growth strategy comprises of four main pillars:

1. Increase sales presence to target and expand addressable market globally – investors can observe this by watching their expenditure on sales and marketing over time
2. further penetrate existing customers and drive recurring revenues through the sales of consumables and services – investors can thus expect that recurring revenues as a percentage of total revenues will increase over time
3. Leverage existing technology to expand into new minimally and non-invasive applications – we can monitor this by keeping our eyes peeled for new product releases
4. Tuck-in acquisitions and strategic partnerships – InMode is at the stage where they are bringing in truckloads of cash and are capable of acquiring smaller companies. However, investors need to keep a look out on whether their acquisitions are sensible and worth it

Using the assumptions shown, I value InMode’s intrinsic valuation to be about USD$66 per share. At the time of writing, InMode’s share price closed at USD$46.85, representing a margin of safety of around 29%.

The compensation for the President and Chief Medical Officer is relatively high compared to other companies. However, on account of the CEO and CTO’s extremely modest compensation, this can be interpreted as a recognition of key talent and that InMode is not a one-man show. This is also indicative of a fair and humble management, both desirable attributes in my opinion.

Additionally, the CEO and CTO both have greater than 10% ownership in the company. As you may recall from my previous post, owner-operators are key attributes of multi-baggers.

Another point to note is that Steve Mullholland is the owner of one of the patents of InMode’s products. His significant ownership of more than 10% also indicates his confidence in the company.

Together, insiders own almost 38% of the company and have significant skin in the game. Shareholders can thus be assured that their interests are aligned.

I see three main risks with InMode.

1. InMode faces competiiton from larger pharmaceuticals which may have greater resources
2. Main form of economic moat is patents, which will expire eventually
3. CEO was co-founder of a similar company (Syneron Candela) and left that company for unknown reasons. There is a real possibility that he may leave InMode abruptly as well

Investors thus have to monitor these three aspects closely. Particularly on the second point, the earliest expiration date on some of InMode’s oldest patents is 2027. Thus, they have five years to develop other economic moats such as brand recognition or cost advantage.

To sum it up, InMode operates in an favourable industry with excellent economics. As a small company, they have a proven track record of growth, high ROE and profitability. Their consistently high margins are indicative of some form of economic moats. To top it all off, management is fair, modest and owner-operators. InMode thus checks the boxes of a potential multi-bagger. In fact, I have already taken a long position on InMode.

If you wish to discuss further about InMode or investing in general, feel free to reach out to me here or join The Dollar Sapling telegram channel to start a discussion!

Disclosure: I am long InMode. I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am not a financial advisor and this information should not and cannot be construed as financial advice. It is merely for me to keep track of my thought processes. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Always do your own analysis and research before making any financial decisions and consult a qualified financial advisor if you have to. Click here for the full disclaimer.