InMode Stock: Recession May Kill Consumer Demand (NASDAQ:INMD)

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Investment Thesis

As the hyper-demand post-reopening cadence is digested, InMode Ltd. (NASDAQ:INMD) is obviously at the losing end, since the impending recession may kill the demand for its business. Analysts will be looking closely at its upcoming earnings call for its FQ3’22 execution and FY2022 guidance, which would be critical for its stock performance then. For now, the stock has already suffered a -51.62% plunge YTD, with the S&P 500 Index also breaking previous June lows while reporting a -20.97% fall at the same time.

In addition, if one had missed our previous price target of mid $20s during the September lows, there might be another chance over the next few weeks. This is assuming reduced consumer discretionary spending causing INMD to miss consensus FQ3’22 estimates and/or lower FY2022 guidance, given the rising inflation and record high oil/gas prices. The August CPI is already showing signs of deceleration for services demand, with professional medical services reporting lower month-on-month growth of 0.2% in August compared to 0.3% in July. Other personal services also reported 0.3% growth in August, compared to 0.4% in July.

The September CPI to be released on 13 October will also provide the critical indicator in consumer spending, speculatively triggering further volatility in the short term. Assuming a moderated inflation rate, we may see an optimistic turnabout in market sentiment ahead, breaking the bearish cycle seen thus far. The Fed’s projected terminal rate of 4.6% by 2023 also possibly indicates a 75 basis point hike in November, with January 2023 moderating with a 50 basis point hike. Thereby, speculatively indicating near bottom levels with baked-in pessimism.

On the other hand, if the inflation rate remains persistently elevated, the Feds may be forced to introduce a more drastic 100 basis point hike for its upcoming meeting by early November, though 64.2% of analysts are predicting an inline 75 basis point hike. Only time will tell, though we are not expecting to see any sustained stock recovery, due to the upcoming winter’s enormous electricity bills, reduced consumer spending on non-essential aesthetic treatments, and naturally, triggering lower capital expenditures in the short term.

Mr. Market Is Cautiously Optimistic About INMD’s Forward Execution

INMD Revenue, Net Income, Gross/ Operating/ Net Income Margin

S&P Capital IQ

For its upcoming FQ3’22 earnings call, INMD is expected to report revenues of $105.29M and operating margins of 46.3%, representing a notable decline of -7.27% though an increase of 3 percentage points QoQ, respectively. Otherwise, a modest increase of 11.79% though a decline of -1.5 percentage points YoY, respectively. This is naturally attributed to the worsening macroeconomics, reducing aesthetic spending that had boomed post-reopening cadence.

In contrast, INMD is expected to report relatively inline profitability, with net income of $45.8M and net income margins of 43.5%, indicating an increase of 3.97% and 4.7 percentage points QoQ, respectively. It is impressive that the company is still able to achieve its robust profit margins thus far, despite the inflationary pressures and global supply chain issues.

INMD Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

In the meantime, INMD is expected to report a Free Cash Flow (FCF) generation of $52.51M and an FCF margin of 49.9%, representing an excellent increase of 13.11% and 9 percentage points QoQ, respectively. Otherwise, a modest YoY growth of 4.55% though a decline of -3.4 percentage points, respectively.

INMD Projected Revenue, Net Income, and Net Income Margin

S&P Capital IQ

Over the next two years, INMD is expected to report revenue and net income growth at a CAGR of 17.75% and 10.6%, respectively. It is essential to note that despite the overly pessimistic sentiments, Mr. Market has effectively upgraded its forward execution by 5.26% since our last analysis in August 2022. The improvement in its net income margins is also encouraging, from 39.1% in FY2019, to 46.1% in FY2021, and finally settling at 40.7% by FY2023.

Meanwhile, INMD is expected to report revenues of $424.2M, net incomes of $185M, and net income margins of 43.6% in FY2022, representing an increase of 18.63%, 12.14%, though a moderation of -2.5 percentage points YoY, respectively. Analysts will also be closely watching its FQ3’22 performance with EPS estimates of $0.53, against FQ2’22 performance of $0.59 and full-year estimate of between $2.11 and $2.16. We shall see, since INMD has always delivered and historically smashed consensus estimates in the past nine consecutive quarters.

In the meantime, we encourage you to read our previous article on INMD, which would help you better understand its position and long-term opportunities.

  • InMode: Alpha Long-Term Growth – Playing The Insurance Game Next

So, Is INMD Stock A Buy, Sell, or Hold?

INMD 3Y EV/Revenue and P/E Valuations

INMD 3Y EV/Revenue and P/E Valuations

S&P Capital IQ

INMD is currently trading at an EV/NTM Revenue of 4.22x and NTM P/E of 13.00x, lower than its 3Y mean of 7.58x and 24.79x, respectively. The stock is also trading at $31.82, down -67.94% from its 52 weeks high of $99.27, though at a premium of 54.46% from its 52 weeks low of $20.60. Nonetheless, consensus estimates remain bullish about INMD’s long-term prospects, given their price target of $44.00 and a 38.28% upside from current prices.

INMD 3Y Stock Price

INMD 3Y Stock Price

Seeking Alpha

Given the factors discussed above, those with higher risk tolerance and long-term trajectory may nibble at current levels, while bottom fishing investors may want to wait to load up at the mid $20s. Good luck all.

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