Hims & Hers Health Stock: Faultless, Ready To Go Higher (NYSE:HIMS)

Investment Thesis

Hims & Hers (NYSE:HIMS) is a telehealth platform that provides access to healthcare solutions.

According to my estimates, HIMS is priced at 30x its 2025 free cash flow. What’s more, the business has no debt. There is a share repurchase program, but this is not a needle mover on my investment thesis. But it does reinforce that this cash flow-producing and debt-free business is undervalued.

The one thing that has held HIMS back has been that it was spending more on marketing to acquire subscribers and that its marketing spend had been outgrowing its revenues.

But this key bearish dynamic has recently changed and hasn’t been the case for a couple of quarters. Indeed, this improvement is particularly noticeable in its Q3 2023 results.

So, let’s get to my bull case.

Rapid Recap,

I’ll be the first to admit that this stock has been an incredibly difficult holding in the portfolio. Even though the company has done nothing wrong, and continues to relentlessly positively surprise, investors have not wanted to get involved with this name.

Back in September, in my previous bullish analysis, I said,

In examining Hims & Hers Health, Inc., I find myself agreeing with some aspects of the short report. These concerns, centered around the sustainability of Hims’ customer acquisition strategy and the question of enduring brand equity, have echoed in my mind for some time.

However, recent financial data, such as the impressive revenue and gross profit growth in Q2 2023, significantly bolster my bullish stance. While the company is not without its risks, the potential for continued profitability and the reduction in GAAP losses signal a promising trajectory.

Since that time, the stock has moved higher, as you can see below.

However, it’s important to note, that despite this strong performance, the stock hasn’t even returned to the highs of 2023, let alone all-time highs.

This means, the stock is starting to deliver positive returns, as investors are starting to understand this company will in the next 15 months be on a forward run-rate of attractive cash flows from operations. More on this soon, but first, allow me to give you some more context.

Why Hims & Hers? Why Now?

I’ll get right to the core of the bear case, so you can understand what causes investors to stay away from this stock. And why the market has been slow to re-value this stock higher.

I’ll go into more detail on its growth rates in a moment, but before that, allow me to get to the heart of the bear case. The bear case largely contends that Hims is spending too much capital on acquiring customers and that it’s difficult to know if the business will be able to profitably operate.

Basically, the question is, after marketing expenses, is there any money to be made?

To answer this question, as succinctly as possible, I say yes. Why? Because revenues were up 57% y/y in Q3, while marketing expenses were up 48% y/y. Similarly, operating expenses were up 46% y/y.

I passionately contend that this divergence between its growing revenue base and the spread with marketing expenses demonstrates that as the business scales, it’s doing so, with less reliance on marketing expenses.

I’m not a fan of overcomplicating any investment thesis. As an investor, it’s all too easy to overcomplicate what we are attempting to achieve.

Clearly, the graphic above shows that HIMS subscriber base is growing very fast. And if the platform is meeting so much consumer demand, why shouldn’t HIMS continue to service that need? It should. Even though the market’s whims right now put more emphasis on demonstrating underlying profitability. This doesn’t take away from the fact that a small and rapidly growing business should not be striving to maximize profitability at this stage. Even though HIMS is already profitable.

Revenue Growth Rates, Big Takeaway

The biggest takeaway for investors is that HIMS is still delivering more than 40% CAGR as it enters 2024. Yes, the comparables will be very challenging in H1 2024, but the business is still more than likely able to grow by 30% CAGR in 2024.

If you’ve followed my work for a while, you’ll have seen me say on numerous occasions, don’t invest in battleground stocks.

Invest in businesses where analysts are busy pumping your stock and raising their revenue consensus figures. And that’s exactly what you see in the graph above.

Furthermore, consider what the analysis community is presently forecasting for HIMS.

The analyst community has their revenue consensus figures rapidly decelerating. More specifically, despite HIMS delivering +45% since becoming public, analysts expect that by this time next year, HIMS will be delivering approximately 20% CAGR. I don’t buy this argument, not when the company has clearly so expertly been growing its revenues for so long, that it will all of a sudden meaningfully slow down.

HIMS Stock Valuation — Cheaper Than It Seems At 30x Free Cash Flow

I use the following chart to show how much investors’ expectations for HIMS have fallen. I’m not saying that 2x forward sales is cheap. I believe that there’s a more indicative measure of value, and that is free cash flow. I show this to show you that this is clearly a ”fallen angel”.

As I look out to fiscal 2025, I suspect that HIMS capex will be around $40 million. This would be a 100% increase from 2023. And while this sounds like a massive increase in capex, I prefer to be safe than sorry. Using this conservative estimate for capex, together with management’s own guidance for $100 million of EBITDA in 2025, this leaves HIMS on a path towards $60 million of free cash flow.

As a point of reference, to support my projection for $60 million of free cash flow, consider how much the trailing 9 months of 2023 have delivered:

As you can see on the left, HIMS’ cash flows from operations we $52 million in the previous 9 months. Clearly, this cash flow generation is strong, and 2023 hasn’t even finished yet.

And yet, this cash flow doesn’t include any capex requirements. This amounted to $16 million for the 9 months of 2023. To be clear, I obviously recognize that HIMS was previously cash flow negative in 2022. But the business has made very strong strides to become positive in 2023, and it is very ambitious on its path toward 2025:

For my 2025 $60 million free cash flow estimate, I’ve presumed that the capex will be approximately $40 million in 2025, up from about $25 million in 2023. I’ve then subtracted the $40 million of capex from its $100 million EBITDA target.

Finally, I keep in mind that provided HIMS is able to continue growing at +30% CAGR, investors will not be appraising this business on its forward free cash flows. Investors simply want to see that there’s a path towards solid cash flows in time, but delivering on this milestone set by management would clearly be a very positive outcome.

Again, the point of my projection is not to over-promise what HIMS could deliver on a rosy scenario, but rather what looks achievable.

The Bottom Line

In conclusion, while acknowledging the challenges that HIMS has delivered, its continuous positive surprises and undervaluation cannot be ignored.

Priced at a 30x multiple of its estimated 2025 free cash flows, with a debt-free status and a growing subscriber base, HIMS appears poised for future success.

Despite concerns about customer acquisition costs, the Q3 2023 financials demonstrate a promising trajectory, with revenue growth outpacing marketing expenses.

As the company scales, it seems to be achieving profitability with increasing efficiency. The stock’s current valuation, depicted as a “fallen angel” by market expectations, suggests a potential for substantial returns, especially considering the projected $60 million of free cash flow by 2025.

In a landscape where analysts are optimistic, and revenue consensus figures are on the rise, Hims & Hers emerges as a compelling investment opportunity in the evolving telehealth sector.