Hims & Hers: Growth Story & Expanding Profitability Promise Exponential Gains (HIMS)

Introduction & Investment Thesis

Hims & Hers (NYSE:HIMS) is a consumer health platform that has outperformed the S&P 500 and Nasdaq 100 YTD. The company recently reported their Q1 FY24 earnings, where revenue and earnings grew 46% and 434% YoY, respectively, beating expectations.

For the full year FY24, the management expects to grow its revenue 39.5% YoY to $1.215B while generating $130M in Adjusted EBITDA with a margin of 10.5% as it builds innovative personalized solutions across its existing and new categories and integrates AI-led capabilities on its technology platform to drive better treatment outcomes. At the same time, the management is committed to driving long-term profitability in the range of 20–30% in Adjusted EBITDA margins as per its latest Investment Presentation, as it benefits from deeper brand adoption and increasing efficiency in its fulfillment process.

Assessing both the “good” and the “bad,” I believe that the stock is well positioned to drive long-term gains, making it a “buy”.

About Hims & Hers

Hims & Hers is a consumer health platform that enables consumers to get access to treatments across a broad range of conditions, such as Sexual Health, Dermatology, Mental Health and Weight Loss through its distributed provider network, electronic medical records system, digital prescriptions, and cloud-enabled fulfillment. At the same time, the company also builds health and wellness products that include prescription and nonprescription products, which consumers can purchase online on the company’s website and mobile applications.

In terms of its business model, the company acquires customers and builds brand awareness through various marketing channels that include social media, search, television, etc., and most of their offerings are sold on a subscription-based pricing model, where customers select a desired cadence to receive products, thus providing Hims & Hers with recurring revenue predictability.

The good: Strong Revenue growth, Increase in subscribers opting for personalized solutions, Robust Innovation and improving profitability

Hims & Hers reported its Q1 FY24 earnings reports, where revenue grew 46% YoY to $278.2M. Out of $278M, Online Revenue, which represents revenue from products and services purchased directly on the online platform in a subscription-based model, contributed 96.4% of the total revenue, while Wholesale Revenue, which consists of non-prescription product sales to retailers, contributed the remaining 3.6%. The strong online revenue was driven by robust growth in subscribers that reached a high of 1.7M by the end of Q1, growing 41% YoY. Most importantly, the share of Total Subscribers who are opting for a Personalized Product, grew 176% YoY as the company made strategic investments in expanding its range of differentiated and personalized offerings across categories, which, I believe, is leading to higher customer satisfaction and retention.

One of the company’s strategic priorities in FY24 is to grow its personalized solutions in its longer tenured categories, which include Sexual Health and Men’s Dermatology where it sees rapid user adoption, with New and Repeat customer revenue growing at a compounded annual growth rate (CAGR) of 84% and 74%, respectively, between 2019 and 2023. At the same time, Hims & Hers is also focused on expanding offerings in newer categories that include Women’s Dermatology, Mental Health and Weight Loss, which the management believes will deliver a total of $100M+ in revenue in 2025. I believe that as Hims & Hers builds its brand and creates customer awareness while expanding its portfolio of personalized solutions at attractive price points, it will enhance the customer experience and see the total number of subscribers opting for a personalized solution as a percentage of total subscribers continue to grow.

At the same time, Hims & Hers is rapidly innovating on the capabilities of its technology platform, where it integrates structured data and feedback from consumers and providers to drive improved treatment outcomes while keeping the data secure and compliant with data privacy laws. Plus, the company also launched a beta version of MedMatch in late 2023 on the platform, where they are deploying artificial intelligence capabilities to identify treatments in real time that are best-suited for a customer’s unique needs for anxiety and depression, which I believe will drive higher consumer confidence on the platform, leading to deeper adoption and brand loyalty.

Shifting gears to profitability, Hims & Hers generated $32.3M in Adjusted EBITDA in Q1 FY24, which grew 434% YoY with a margin of 11.6%, compared to 3.2% in the previous year. The company was able to drive such a significant expansion in profitability by streamlining its operating expenses as well as improving efficiency through their fulfillment process. In terms of operating expenses, Hims & Hers was able to shrink its Marketing spend by 400 basis points to 47% of total revenue in Q1, as they benefited from new personalized product launches and improving customer acquisition trends. The management is focused on continuing to improve its profitability based on its Investor Presentation, where it expects to achieve 20–30% Adjusted EBITDA margins in the long term. I believe that if the company continues to see an increase in the number of subscribers opting for personalized solutions as it builds new products in its tenured categories as well as expands across newer specialties, coupled with robust capabilities for personalized treatment on its platform, it will continue to improve its unit economics and shrink its payback period.

The bad: Heavy reliance on marketing to drive brand awareness, Macroeconomic slowdown will hurt growth prospects

Given the business model of Hims & Hers, where it operates as an online health and wellness platform providing users access to its platform, distributed network, and clinical capabilities, the company is required to continually invest heavily in its marketing budgets to acquire users and drive brand visibility. Although the management is committed to improving long-term profitability as it improves brand loyalty and retention, thus shrinking its payback period, the company is dependent on social media influencers and brand partnerships to drive marketing campaigns as well as paid ads. This is one of the reasons why I believe the company’s marketing spend has remained at historically elevated levels, as the company spent ~47% of its revenue on marketing expenses on an adjusted basis in Q1. As I noted earlier, this has come down from 51% a year earlier, but it’s still high.

On the macroeconomic front, the company seems to be benefiting from higher discretionary spending as the economy does not see signs of slowdowns or recessions yet. However, given the elevated level of interest rates, the US consumer is increasingly getting squeezed on credit card debt, which has climbed to an all-time high of $1.129T. Plus, we are also seeing signs of the US labor market cooling as the unemployment rate gradually ticked up to 3.90%, up from 3.8% in the previous reading. Therefore, should we see a slowdown in the US economy, the growth trajectory of Hims & Hers will be negatively impacted.

Tying it together: Hims & Hers is a “buy”

Looking forward, Hims & Hers is expected to grow its revenue by 38–41% to $1.2-$1.3B while generating approximately $130M in Adjusted EBITDA, representing a margin of 10.5%. I believe the company should be able to achieve its FY24 target and grow its revenue in the low to mid-twenties range over the next 2 years as it continues to innovate its offerings in its tenured categories while unlocking opportunities in newer specialties, such as Weight Loss, Women’s Dermatology and Mental Health which are expected to generate $100M+ each in 2025. Coupled with the improvements in its technology platform, along with improving brand awareness, I expect the company to see a higher number of customers opting for personalized solutions as confidence and brand loyalty grow.

I believe the above will allow the company to unlock operating leverage as it shrinks its payback period and improves its efficiencies in its fulfillment process. This will lead to the company further expanding its margins over the next 2 years, and assuming an Adjusted EBITDA margin of 13%, it should generate an Adjusted EBITDA of $240M by FY26, which would be equivalent to a present value of $181M when discounted at 10%.

Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% over a 10-year period with a price-to-earnings ratio of 15–18, I believe that Hims & Hers should be trading at approximately 2.5x the multiple, given the growth rate of its earnings. This would translate to a PE ratio of 37, or a price target of $31, which would represent an enormous upside of 152% from current levels.

Although Hims & Hers is required to spend a substantial amount of money on marketing to build its brand visibility, which can be problematic should the US economy weaken, causing a slowdown in consumer discretionary spending, I believe the company is uniquely positioned, given its product innovation, to continue to gain loyalty and adoption while improving margins at the same time. Given the risk-reward, I believe the stock is well-positioned to drive long-term gains, making it a “buy”.

Conclusion

I believe that Hims & Hers can drive long-term upside over a 3-year investment horizon as the company continues to expand personalized solutions across existing and new categories while integrating AI capabilities into its platform to drive better personalized treatment outcomes. Plus, given the management’s commitment to financial discipline, I believe the stock is attractively priced from a risk-reward standpoint, making it a “buy”.