3 Reasons I'd Consider Selling InMode’s Unusually Active Put Option

If you’re unfamiliar with the Israel-based company, InMode (INMD)provides minimally invasive RF technologies for plastic surgery, gynecology, dermatology, otolaryngology, and ophthalmology.

In 2024, the company’s shares are down 15% and more than 46% over the past year. In 2021, they traded over $90. Despite the considerable decline over the past 29 months, its business has performed reasonably well, delivering revenue growth in both 2022 and 2023 with only a slight slowdown in profits. 

I’m not a techie by any means, so do your own research to verify the merit of its technology, but in Wednesday’s options trading, InMode had an unusually active put option that caught my attention. 

Here’s why selling a few might be an interesting play for aggressive investors. 

Valuation Is Very Low

InMode went public in August 2019, selling five million shares at $14. If you invested in its IPO and still hold, you will have gained 35% over 56 months, an average annual return of 7.5%. The S&P 500 gained 77% over the same period, more than double. 

There's no question it has underperformed.

According to Morningstar.com, its current P/S and forward P/E ratios are 3.30x and 7.39x, respectively, less than half their five-year averages. When it went public in 2019, it had an earnings yield of less than 3%. Today, it’s four times that, at 12.18%. 

Admittedly, its guidance for 2024, in combination with mediocre results in Q4 2023, has turned investors off INMD stock, knocking 29% off its share price since it announced earnings after the close on Feb. 12.

However, consider where it stands in 2024. 

As it stated in its Q4 2023 press release, it expects $500 million in revenue in 2024 at the midpoint of its guidance, with 84% gross margins and $2.55 in earnings per share. 

If it meets these midpoints, revenues would increase by 1.6%, gross margins would be unchanged, and EPS would fall by two cents. 

That hardly seems worthy of a 29% haircut.  

There’s Nothing Wrong With the Balance Sheet

InMode finished 2023 with $742 million in cash, cash equivalents, and short-term deposits against just $9 million in debt. On a per share basis, that’s $8.73 in net cash per share based on approximately 84 million shares outstanding. 

If you subtract the $8.74 in net cash from its $18.89 share price, as I write this, you’re talking about a $10.15 valuation, or less than 4x its projected earnings for 2024. 

Even if you feel that revenues and earnings won’t come close to management’s 2024 projections, its cash cushion should prevent it from falling too much further. 

According to Barchart.com data, six analysts cover its stock, rating it a Moderate Buy (4.00 out of 5) with a mean target price of $29, 54% higher than where it’s currently trading.

One headwind that’s worked against the company in the past year is higher interest rates.   

“As previously mentioned, over 80% of the platform sales are facilitated through leasing agreements. Higher interest rate and longer leading -- longer lending approval cycles have impacted InMode's overall growth rate,” stated CEO Moshe Mizrahy in its Q4 2023 conference call. 

Mizrahi also mentioned that some patients are more sensitive to price increases for its aesthetic treatments, which reduces demand and revenue. 

To solve both of these issues, it is working on solutions for both patients and physicians. 

“[W]e are in the process of establishing [an] approval program with a financial institution to improve and expedite the credit decision process. In some cases, we directly leverage our strong balance sheet to support physicians by providing a financing option ourselves,” Mizrahi said. 

If John Deere can provide financing options for farmers, InMode can too.

The Bottom Line on InMode

I’ve written about stocks long enough to know that plenty of aesthetic-based businesses crash and burn after meteoric rises. This is not a stock to finance your retirement. 

However, it is entering new markets, such as ophthalmology, to generate revenues that are less price-sensitive. I’d follow these new products closely to see their uptake by physicians and patients. 

In 2023, it was Envision (ophthalmology) and Define (hand-free aesthetics). In 2024, it plans to launch two more, along with new technology for existing products. In total, it plans to bring five major new platforms to market in the next few years. 

As I said, many companies in this field have promised lots and delivered little. InMode doesn’t appear to be such a company, making the risk/reward proposition compelling. 

Finally, the unusually active put option from Wednesday was the Jan. 17/2025 $27.50 strike with a $9.10 bid. Considerably, in the money, the price you’d pay if you had to buy the 100 shares at expiry in 282 days would be $18.40. It’s currently above that.

Barchart’s technical indicator has a strong sell recommendation on INMD at the moment, so there’s no question this isn’t for the faint of heart. 

However, if this stock hits the mean target by expiry, you’ll have a 75% annualized return with no money down.

That said, your downside is unlimited, so the risk is considerable.