The producer of beauty equipment InMode was one of my best investments in 2019 with a profit of over 200% in just a few months.
Despite the outstanding figures of the last quarters with very high growth rates and enormously high margins, I had sold my last shares at $45 (more on this in a moment).
Recently I came across new information that made me sit up and take a closer look at InMode again.
InMode only went public in August 2019, but already has an impressive track record.
There were good reasons for this outstanding increase, because compared to many other IPOs such as Uber or Pinterest, InMode is a highly profitable company with high growth rates.
At the time of the IPO InMode was significantly undervalued and the probability of exceptionally high profits was very high. This assumptions proved to be correct.
Nevertheless I feared that InMode was a second Syneron. Syneron also sold beauty modules similar to those that InMode sells and was also lead into public by one of the InMode founders.
After a similarly sharp increase as for Inmode in the first months after the IPO, Syneron’s share price fell back to the IPO level in the following years. Syneron was then acquired by another company.
So there are some parallels between the two companies, that led me to take my profits after InMode had risen to a more realistic valuation level.
The Q3 2019 numbers and the Earnings Call
Despite my fears, InMode continued to perform in the third quarter with extremely high growth rates and margins.
Based on these figures, InMode would still be undervalued.
Revenue +57% YoY
Net Income +87% YoY
In the Earnings Call, CEO, founder and major shareholder, Moshe Mizrahy, spoke about new products, the international expansion in 2020 and also issued a forcast for the full year 2019.
The main points
- New product Evolve successfully launched in Q3 in the US (currently 9% of sales)
- Currently, about 10-12 approvals are pending for various products in different countries, among others for Evoke and Morpheus8
- The Sales Team will be further expanded in the USA and internationally in 2020
- New subsidiaries are founded in Asia (China) and Europe in order to expand into these regions
A convincing statement that 2020 could also be a very good year for InMode.
InMode expects further significant sales growth of 41% YoY in Q4.
The gross margin should also remain at a high level, around 85%.
Based on these figures, there are as yet no indications that growth will slow down significantly or that profitability will suffer.
Just a few days ago, I came across a report by Ihor Dusaniwsky of S3 Partners, who has established himself as the most outstanding source for short data.
Ihor published a list of possible short squeeze candidates in the U.S.: „some potential new short squeeze candidates in the U.S. market“.
Among them, you can already guess it, is also InMode.
Apparently many short sellers are now betting against InMode and on a crash of the stock. Over 20% of the free float has been sold short.
Particularly outstanding is the amount of fees that shortsellers are currently willing to pay annually to borrow the shares. This rate is now at 78% and has risen sharply, especially in the last month.
Inmode (INMD) shorts have been growing their exposure slowly since September 2019, increasing shares shorted by almost 400 thousand shares in just over four months. Shorts were down -$39 million in mark-to-market losses in 2019 and are down another -$16 million, or down -15%, in 2020. The slow growth of shorted stocks implies a not-so-cordial conviction in trading, and with stock lending rates of 78.04% fee, the stock lending alpha erosion may displace the less cordial shorts from their positions.
Shortsellers not only have to pay extremely high fees, but are already clearly in the red as a result of the rise in share price, for 2019 and 2020 together with USD 55million, i.e. about 34%.
The Shortseller Investment Case
But despite the good figures, high fees and accumulated losses, what is still motivating short sellers to bet against this stock?
Although some of them may remember the Syneron disaster, I believe that this actually convincing argument is unknown to most short sellers.
The mindset of the short sellers and their investment case becomes clear when you read the latest article on Seeking Alpha.
The short seller Marvl Research explains his reasons for the short sale of the share.
Marvl Research Report
As with most short seller reports, the aim is not to provide neutral reporting, but to push the price down as much as possible in order to make profits.
Accordingly, the article is also written one-sidedly. It is argued that InMode is overrated because:
- the sales of two products from Q1 2018 and Q1 2019 had fallen
- most of the clinical literature about the success of the InMode products has been written by people close to InMode
- a too high proportion of sales would be earned with the equipment rather than with consumables
- the user reviews on the internet were only moderately good (at least for BodyTite, FaceTite)
All these arguments are very weak and far less convincing than other short-seller reports.
For example, the short seller Black Mamba had supported the crash of the varta stock, becasue he was able to prove that at least some of the batteries came from Chinese manufacturers instead of Varta by sawing open wireless headphones
That’s what I call commitment!
Basically, all of these arguments can be dispelled with the continued strong growth that is also expected in the fourth quarter.
Even the Marvl Research authors do not seem to be quite so convinced of their own argumentation:
„Despite our overall bearish conclusion, we acknowledge multiple positives about InMode, including experienced management, excellent profitability and impressive US sales operations. Furthermore, our report is skewed towards analysis of BodyTite and FaceTite, because we assume that these are INMD’s most differentiated procedures supporting company future revenue growth.“
In fact, their entire line of argumentation refers to two products that InMode has been offering for quite some time. Therefore, slowing sales growth is not surprising.
What Marvl Research also fails to mention is the expected continued high growth of 41% in Q4, which is partly driven by the introduction of new products like Evolve and not just the two products they focused on in their report.
InMode is also expanding internationally, opening up further growth potential.
A deceptive package for the true short investment case
All these arguments are a scam that is intended to nicely package and disguise the real reason for the rising shortseller positions.
Like most market participants, short sellers in particular tend to have a very short-term orientation. They hope for quick profits from plummeting prices, which they can quickly realize to then move on to the next victim.
The real reason for this short-selling march is not the arguments of Marvl Research, but rather February 4, 2020.
Marvl Research writes: “ With the lock-up period expiring on Feb 4, 2020, the current market valuation of ~$1.6B seems unjustifiably high to us.“
All short sellers are longing for this date, as it is the day when the so-called „lock-up period“ expires.
As with most IPOs, the company’s major shareholders and insiders have committed themselves not to sell shares for a period of 180 days (lock-up period).
With the end of this period, the short sellers hope is that there could be more insider selling, which should cause the share price to fall.
This short-term motivation is also the only logical explanation why short sellers accept exorbitant fees of 78% and more. No one would do this with a buy-and-hold strategy.
What the Shortsellers overlook – Blackout Period
We have to ask ourselves whether the shortsellers are right and whether a sell-out by insiders is imminent.
Shortsellers are focused on the lock-up period, but overlook the fact that there are other regulations for insider sales. Besides the lock-up period, there are also so-called blackout periods during which insiders are not allowed to trade.
Blackout periods begin a few weeks before the publication of the quarterly results and end shortly after their publication. The Q4 quarterly results will be published on Feb 2., so InMode is already in the blackout period.
This is also clearly explained in Inmode’s Insider Trading Compliance Policy.
To be on the safe side, I called the Investor Relations department of InMode in the USA and had it confirmed.
The blackout period applies to the following persons (Schedule A). Individual employees who are not on the list could sell shares or exercise options if they owned any, but I would not expect big amounts.
This means that all key directors may only sell their shares after the quarterly results. This means that insider sales, at least of this group, are frobidden until the quarterly results on Feb 18th will be released.
Principal Shareholder are still holding 59% of all stocks.
The majority of the shares are still held by a few individual shareholders. 32.7% are controlled by the two founders Dr. Michael Kreindel and Moshe Mizrahy, who are not allowed to sell shares during the blackout period.
26.9% are held by two other companies, Israel Healthcare Verntures and SpaMedica, in which Jos Ensink and Stephen Mullholland hold a majority stake. They could sell if they wanted.
Up to 10% of (1) belong to Dr. Hadar Ron, potentially another 1.3% less shares available for sale.
The other two directors, Shakil Lakhani and Dr. Spero Theodorou, already sold their shares during the secondary offering in December.
So in total only around 25% of the shares are available for sale by insiders before the quarterly results.
However, whether these two major shareholders who hold those 25%, Jos Ensink and Stephen Mullholland, will actually sell shares is highly questionable.
They are connected with the founders. A sale by them would also have a negative impact on the share packages of the founders. This is unlikely to happen. Such a sale would only take place if their relationship were disrupted.
Secondly, Jos Ensink and Stephen Mullholland did not offer shares during the second offering, although they certainly would have had the opportunity to do so.
For those reasons, I do not believe in a sell out by those two major shareholders who are allowed to sell after the end of the lockup period.
If this sell-off does not take place, there is still the possibility of a sell-off by insiders after the quarterly results.
The question is, how many shortsellers after a possible disappointment on 04.02. will not liquidate their positions before then, thus driving the share upwards and possibly into a short squeeze.
It is also questionable whether insiders will be willing to sell after the quarterly results, as the results are likely to be very good again. If InMode can come up with a strong outlook for 2020, the shortsellers will not be able to hold their up for long with the currently exorbitant borrowing fees.
I was able to earn a lot of money with InMode after the IPO, but had sold the shares because I expected a second Syneron.
However, my fears of a deteriorating business performance have not yet been fulfilled. InMode maintained its high growth rates and margins throughout 2019.
The shortsellers who are currently betting against InMode have a very short-term investment case, essentially focused on the lockup period, which could very quickly turn out to be untenable if insiders do not sell as expected.
The blackout period prevents the two founders from selling their shares until after the next quarterly earnings. The internal links between the founders and the two remaining majority shareholders make an insider sale seem unlikely.
The fourth quarter is also expected to be very good. If there are no high insider sales afterwards, a short squeeze is likely due to the high short quota, the extremely high borrowing fees and low volumes in the InMode stock.
From these conclusions, an interesting long investment case could emerge. It will be important to keep an eye on the short quota and possible insider sales.