Pills Pay The Bills: Mini Deep Dive On Hims & Hers Health (NYSE:HIMS)

I first owned Hims & Hers Health, Inc. (NYSE:HIMS) in early 2021, when the company completed its merger with the SPAC, Oaktree Acquisition Corp. SPACs’ growing bad reputation, in combination with the falling market, forced me to exit my low-conviction positions, including HIMS.

Last Spring, someone from my team brought Hims & Hers back to my attention, so I started to dig in. I decided to do a deep dive into the company to determine if there was enough upside to justify a position. I missed the big move off the May 2022 lows, when the stock was in a $3-4 range; I started building my position in the $8s last summer (I probably added to my position a dozen or so times over the past ~6 months).

HIMS had an incredible Q2 2023, popping 20% on the results before giving it all back in the next several sessions. At that point, I started to think that its stock price was completely detached from its strong fundamentals, making it an attractive buying opportunity. So, I began accumulating shares shortly after.

Even though HIMS has never been stronger, the stock is still -43% from the all-time highs in 2021 — I think we get back to those highs in the next 12-18 months.

It’s impressive the progress that HIMS has achieved in such a short period of time since its inception. Commercially launched in 2018, in just six years, it went from a tiny startup to a multi-billion-dollar public company with phenomenal revenue growth (CAGR 80%+ in the past five years) and 1.5 million subscribers as of the end of 2023, up almost 50% compared to 2022.

The company has also consistently beat estimates, making me even more optimistic for 2024.

When HIMS reported Q4 2022 earnings and gave 2023 guidance, they said revenues would be $735-755 million. Since then, they have reported $872 million, which means they have beat their original guidance by 17%. This leads me to believe that management is being conservative with their 2024 guidance of $1.17 billion to $1.20 billion and probably thinks they can get to $1.3+ billion, which is a 10% beat from the midpoint.

If HIMS makes $1.2 billion this year, it will result in 37.6% YoY growth. If it makes $1.3 billion this year, it will result in 49% YoY growth. Either way, it’s lining up to be a good year for the company. More importantly, we’re going to see continued margin expansion, which should include GAAP profitability for the full year 2024

I do believe there’s a large segment of investors who have dismissed HIMS for the past year or so because they were unprofitable, but that’s no longer the case.

Here are the estimates for the next three years. As you can see, now that HIMS is profitable, we should see strong EBITDA, EPS, and FCF growth over the next few years. If HIMS can grow FCF to $243 million in 2026, then the stock definitely has an upside from here. At those growth rates, you could easily put a 30x multiple on 2026 FCF, which gets you to $7.5 billion (including cash) versus the current enterprise value of $2.8 billion.

In my investment model, I don’t have columns for FCF, but HIMS may have even more upside over the next 3-5 years if investors focus their attention on it. I was also relatively conservative with my estimates for revenues, margins, and multiples—I think there’s an upside to all of these.

HIMS had a more impressive Q3 2023, but it was not until the fourth quarter of 2023 that the stock finally began to move. It was a combination of several factors and achievements that lined up perfectly for the company. To start with, Hims & Hers delivered its first-ever GAAP profitable quarter, posting a net income of $1.2 million. Management went further and announced on the earnings call that the financial year of 2024 will be the first full year with positive earnings.

Next, the company provided very strong 2024 guidance. Revenue is expected to be between $1.17 and $1.2 billion, representing a solid 38% YoY increase and beating analysts’ prior expectations of $1.1 billion. At the same time, the company expects to deliver $120 million of Adjusted EBITDA with a 10% Adjusted EBITDA margin. Both these metrics are one year ahead of management’s prior targets.

Revenue growth is decelerating, but that doesn’t matter (too much) if earnings growth is accelerating, and that’s what really drives a higher stock price.

HIMS’s revenue CAGR was 80% from 2019 through 2023, which was obviously not sustainable. HIMS is entering a new stage of its lifecycle where it wants to balance revenue growth and profitability—with a bigger-than-ever opportunity in healthcare. I will cover this further in this writeup, but before that, I want to address two vital points.

Marketing has been the company’s number one expense, with the majority of spending going towards customer acquisition. HIMS is constantly being criticized for its heavy marketing spend, which was 100% of revenues less than two years ago but now it’s down to 50% of revenues and on the way to 30% of revenues (according to management).

HIMS is nowhere near peak scale or saturation so I don’t need or want a big decrease in marketing spend yet. I’m fine with their marketing spend as long as the payback period is reasonable, churn stays low, and the company continues to increase cross-selling (adding more products to each customer relationship), which brings down CAC (customer acquisition costs) and really helps with margins.

It is foolish not to spend on customer acquisition when your opportunity is 100+ million people, and you have just 1.5 million subscribers. This is why shareholders should be excited as HIMS pushes into new categories like weight loss: it will help increase ARPU (average revenue per user) while lowering the CAC on those users because they’re already in the system.

I also want to emphasize that the company’s marketing spend efficiency has improved dramatically in recent years. In 2019, it took the company over a year to cover its marketing expenses. It only took around half a year in 2023 despite the elevated CAC per new subscriber, especially in the past three quarters. The advertising market is slowly recovering after the 2022 crash, and 2023 saw higher demand. So, going forward, the CAC will remain elevated, yet the company will still be able to pay back these expenses within a year while scaling the business profitably.

The second point I want to address is the competition and lack of moat. I keep seeing people compare HIMS with Teladoc (TDOC) (apples to oranges) or say that Amazon Pharmacy, which offers cheap prescriptions and pills, will eat HIMS market share, not to mention other startups operating in this niche, like BetterHelp (owned by Teladoc) or Roman (owned by Ro).

In reality, HIMS is gaining market share from other telehealth providers offering similar services and products, and it does so at an incredible rate. These are not the company’s figures but rather Bloomberg’s, and they speak for themselves.

I believe there is a reason for that, and I will further outline what will drive Hims’ business further and why it has a chance to become a clear leader in this space.

Investment Thesis

Healthcare in the U.S. is a mess. In my HIMS deep dive, I described in detail many of my experiences getting an appointment with the doctor. While I have never used HIMS, I fully understand what the company is trying to achieve: to enable almost every household in the nation to find a level of personalized care that has historically only been available to the wealthiest subset of the population. It is on a great mission, which I like and support. But it also has to be a great business with enough upside for me to get and stay invested. And I believe HIMS is the one.

I want to start with its ‘land and expand’ business model. New users initially come for one particular product, establish trust with the company’s brand over a couple of months or a year, and then start using other products, becoming subscribers with multiple subscriptions.

And the pull of potential customers is enormous. As of the end of 2023, the company operated in five core specialties: sexual health (which impacts an estimated 80 million people in the U.S.), men/women’s dermatology (~80 million people), mental health (~100 million people and growing), and weight loss (~100 million people and growing), which the company launched in the fourth quarter of 2023. That is a massive total addressable market, or TAM, with 90% yet to seek treatment.

Not only does each of these five specialties have room for category expansion (for example, in sexual health, fertility is a $5+ billion opportunity, or in mental health, insomnia is a condition suffered by at least 30% of the adult population in the U.S.), further extending its TAM and giving consumers greater access to a broader range of healthcare services and products, but also the company can continuously evolve its suite of offerings, leading to more initial sales and cross-sales among existing users.

In 2023, for example, Hims launched Hard Mints in chewables in the men’s sexual health category (which has already become a big hit among users and will drive meaningful growth for this category), Hair Blends in women’s dermatology, the company’s first multi-action offer in heart support, and the biggest of them all—a weight management offering, which offers personalized solutions designed around addressing the underlying causes of weight gain.

Personalization is actually a big part of the investment thesis. There is a clear ongoing shift from ED to more personalized care for multiple conditions. Personalized solutions are great in two ways: first, they increase a customer’s LTV by keeping them on the platform for as long as possible, and second, they help facilitate the acquisition of new users. Offering a personalized solution vs a one-size-fits-all is a really strong value proposition.

The early numbers are impressive: Hers dermatology patients choose personalized solutions over 75% of the time, while essentially all subscribers to the new weight loss program opt for personalized treatment. As of Q4 2023, approximately 30% of all subscribers have subscribed to one or more personalized products. The move to personalized subscriptions will only accelerate going forward, as already reflected in a much stronger guidance for 2024.

And there is something that will help enable this shift more rapidly and effectively – AI, or more specifically, the ability to leverage AI capabilities across vast data that the Hims platform generates. This data is essential for creating new, improved solutions. It is also vital for providers to more efficiently match users with the right treatment.

The stronger the personalization engine becomes, the more sticky the customers will be. Moving customers to personalized subscriptions also means longer (multi-month) subscriptions, which, in turn, shortens the company’s CAC payback period. This type of subscription may carry a lower gross margin due to a more affordable price (sign up for a longer period but with a lower monthly rate), but the benefits could outweigh it in the long term: Hims being paid more upfront, the churn rate can improve significantly, and the cost of revenue will also go down.

On the price side, management wants to make it more affordable over time to enable the mass market, but it wants to do it without significant margin erosion (long-term gross margin goal is 75%+ vs. 82% in 2023). Things like the shift toward affiliated pharmacies in Q4 2023 will help offset the margin impact of lowering prices. Now, 85% of orders will go through the company’s affiliated pharmacies, which will allow it to realize the benefits of scale and ultimately pass value back to consumers in the form of some price reductions and additional value-added services.

The mass market prices and personalized solutions, combined with the unique experience that Hims provides through its mobile app, will win many new customers in the coming years, translating into great top and bottom lines.

By the way, the company’s financials are already pretty strong: it has no debt, a strong cash balance of $221 million (up over $41 million from the end of 2022), manageable stock-based compensation, and accelerating free cash flow. The latter turned positive in Q1 2023 and has stayed so for the entire year. Hims generated $56 million in FCF in 2023 and will generate at least another $90 million in 2024, which it can reinvest back into developing better and more effective personalized solutions and expanding its affiliated pharmacies.

Valuation

I already shared my investment model above, so let me go through a couple of valuation metrics quickly.

HIMS is expected to be profitable in 2024 (GAAP and non-GAAP), and the numbers aren’t huge yet, but HIMS should do ~$100 million of net income, which means the stock is trading at approx 28x 2024 EV/NI, which is cheap when you look at the expected growth rates for the next couple years.

There’s a good chance that HIMS will grow net income and EPS by triple digits in 2024, then another 35-45% in 2025 and 2026, so a 40x multiple on 2025 numbers would be very reasonable. If HIMS does $140+ million of net income in 2025, throw a 40x multiple on that, add back the cash, and divide by 220 million shares. You get ~$28 per share, which is almost exactly 100% upside over the next two years (that’s what I’m expecting). However, it’s possible that HIMS will exceed these estimates and make $150-160 million in net income in 2025, which means the upside could be greater.

It also appears FCF could start exceeding net income and growing faster, in which case HIMS might do $165 million of FCF in 2025. You put a 45x multiple on that (given the higher growth rates), add back the cash, divide by 220 million shares, and now we’re talking about a stock in the mid-$30s in the next 18-24 months.

Personally, I think the next couple of years are set up really well for HIMS with strong growth and margin expansion. The bigger question for long-term investors might be where growth and margins normalize towards the end of this decade, and I don’t know the answer. It’s hard enough trying to forecast the next couple years, looking past that is truly a guessing game especially when talking about the US healthcare system and all the products that have not even been created/approved yet.

Even though HIMS is up 150% in the past four months, it’s still a reasonably priced stock; however, that doesn’t mean we won’t get a ~20% pullback at some point, which is when I’ll be adding to my position. If we see HIMS under $10 (assuming the fundamentals are still strong and my investment thesis is still intact) then I’ll be adding to my position very aggressively.

The chart above is the weekly going back to when HIMS did the SPAC merger.

The chart below is the daily. It’s been a great-looking chart for the past few months. If we get pullbacks, I’d expect to see buyers stepping in at that $13 level, which was the prior high from May 2023.

Not sure if tech, AI, cybersecurity is about to take a breather but it’s certainly possible we see some rotations into other sectors and healthcare could be one of them. On top of that, the Russell 2000 Index (RTY) is on the verge of breaking out of a 2-year base in which case we should see small/mid caps catching a strong bid and in that scenario I’d expect to HIMS to do very well considering their strong fundamentals, GAAP profitability and compelling valuation.

Conclusion

I’m not sure if tech, AI, or cybersecurity are about to take a breather, but it’s certainly possible we will see some rotations into other sectors, and healthcare could be one of them.

On top of that, the Russell 2000 is on the verge of breaking out of a 2-year base, in which case we should see small/mid-caps catching a strong bid, and in that scenario, I’d expect HIMS to do very well, considering their strong fundamentals, GAAP profitability, and compelling valuation.

I’m definitely bullish on Hims & Hers Health, Inc. stock right now.