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I last updated InMode Ltd. (NASDAQ:INMD) investors in November 2023, shortly after it fell to a three-year low in October. I assessed that INMD has likely struck its long-term bottom, suggesting the worst is likely over. While INMD has underperformed the S&P 500 (SPX) (SPY) since my upgrade in November, it has consolidated constructively. Despite that, INMD has not seen the renewed enthusiasm observed in the likes of other med tech stocks that saw a resurgence since falling to their October lows after encountering significant headwinds last summer.
As a med tech player specializing in aesthetics, the near-term headwinds are expected to persist. Notwithstanding the Fed’s potential rate cuts in 2024, Fed Chair Jerome Powell’s recent press conference suggests a March cut is increasingly unlikely. Despite that, it hasn’t stopped the healthcare sector (XLV) from taking out a new high in January 2024, which could lift INMD from its relative underperformance moving ahead.
Baird analysts underscored their confidence in the med-tech business in 2024, seeing a revival after “three years of underperformance.” Several market leaders, such as Stryker (SYK), DexCom (DXCM), and Intuitive Surgical (ISRG), have seen their stock perform relatively well. Despite that, the iShares U.S. Medical Devices ETF (IHI) has yet to take out its 2021 all-time highs, suggesting the outperformance hasn’t been broad-based.
Moreover, Baird highlighted its caution over the “dental and aesthetics markets,” suggesting related stocks could be under pressure in the near term. As a result, investors are urged to assess and select companies that have proved their profitability as they navigate the near-term headwinds.
Observant investors should be aware that InMode is slated to report its fourth-quarter and FY23 earnings release on February 13. Management initially stunned the market as it posted an update that likely disappointed investors in early December, indicating a lower-than-expected performance for Q4. InMode stressed that a downgrade was essential, given the “stronger-than-expected headwinds from the current macroeconomic environment.” Consequently, it led to a further “slowdown in platform sales, primarily in North America.”
However, management posted another update in mid-January, suggesting an updated range that is more robust than its revisions in December. It also telegraphed its FY2024 outlook, indicating tepid growth in FY24. Accordingly, InMode expects a midpoint revenue guidance of $500M in 2024, suggesting an estimated 1.7% YoY growth. As a result, I believe the company’s guidance aligns with Baird’s caution, pointing to challenges in the aesthetics market that are expected to persist for at least another fiscal year.
Despite that, Baird also highlighted that the significant interest in weight loss drugs could bolster the opportunities in companies like InMode. Given its leadership, InMode seems well-poised to capitalize on “the industry shift from liposuction to body contouring.” In addition, investors should also anticipate renewed interest in “skin-tightening procedures” bolstered by the increasing demand for weight loss drugs that have recently lifted the stock of Eli Lilly (LLY) and Novo Nordisk (NVO) to new highs.
However, given the tepid guidance from InMode for 2024, these opportunities aren’t likely expected to move the needle in the near term, suggesting InMode likely didn’t sandbag its guidance. Furthermore, the “Ozempic face” phenomenon has also not led to a “significant increase” in AbbVie’s (ABBV) Botox sales yet, corroborating my observation. As a result, InMode investors who add at the current levels must remain patient, even as I gleaned it to be at its long-term bottom.
Notwithstanding my caution, INMD’s “B” valuation grade is relatively attractive, suggesting significant pessimism has been reflected. Its best-in-class “A+” profitability grade underpins its business model as it navigates its near-term challenges. With the Fed no longer expected to be a significant dampener on med tech’s valuations, it should help underpin INMD’s ability to bottom out, as seen in its price action over the past four months.
INMD price chart (weekly, medium-term) (TradingView)
As seen above, INMD has continued to grind higher from its October 2023 lows ($18.5 level). That level has consistently attracted dip-buying sentiments over the past four months as selling pressure subsided.
As a result, I gleaned that the market has started moving well-battered med-tech stocks like INMD from their bottom, although the recovery could take longer. However, the risk/reward level is attractive, as INMD has not participated in the healthcare sector recovery yet, allowing dip buyers to pick their spots before the market gleans the potential upside opportunity.
Rating: Maintain Strong Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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