Hims & Hers stock is now cheaper than it was before the recent run-up

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Sometimes the market treats some companies unfairly, pricing them at lower prices than their fair value. This is particularly common for newly-listed or small-cap companies that are largely unknown to most investors. However, if these companies pass the Wall Street tests and perform beyond expectations, the market will eventually reward them. This is the case with Hims & Hers ($HIMS), a newly-listed and small-cap growth company.

In late February, HIMS reported earnings results that once again exceeded analyst estimates across the board. As you can see below, the market reaction was quite positive, sending HIMS stock up by over 40% in two days.

The stock was actually overdue for a spike. The company has been delivering impressive results for over two years now, but this performance hasn’t been fully reflected in the stock price. While HIMS stock may now seem more expensive than before the rally, the opposite is true. Let’s see why.

The Healthcare Company of the Future

Hims & Hers has become massively successful in a very short period of time. The company was founded just 7 years ago and it’s now worth over $3 billion. It’s officially one of the most successful startups of recent years.

Hims is revolutionizing healthcare by offering digital-first, personalized treatments for a wide range of chronic conditions. While it initially sold erectile dysfunction treatment online, combining privacy and a user-friendly experience, it quickly expanded across other verticals. Its modern, digital-first, model worked for other conditions including hair loss for men and women. Fast forward to today, and Hims offers treatments for many different chronic conditions including anxiety, depression, sexual health for men and women, and many others. It recently entered the massive weight loss space, offering personalized treatment plans for a monthly subscription fee.

Hims has built a unique telehealth platform that brings together the most valuable elements of consumer brands, tech, and healthcare companies. On top of that, its subscription-based model makes the company very attractive to investors.

Hims is going to benefit from the personalization trend in healthcare. It uses AI to offer personalized treatments to patients, helping them treat conditions that in many cases, would have gone untreated. Personalizing treatments and making them accessible through an affordable, user-friendly platform not only helps Hims gain market share but also dramatically increases the lifetime value of its customers. Hims customers could remain subscribers for decades, receiving treatment for different chronic conditions at different life stages.

Hims essentially democratizes and modernizes healthcare, offering treatments in a way that resonates with younger generations. Part of the democratization is affordable pricing. In 2023, HIMS lowered the prices of its subscription plans, alarming investors, and sending its stock sharply lower. However, that was a smart strategic decision that made the platform more popular and accessible. It can greatly benefit the company over the long haul.

Impressive Top & Bottom Line Performance Sign Of A Highly Efficient Business Model

There are hundreds of millions of people suffering from a chronic condition in the US alone, creating a massive growth opportunity for Hims. The company is well-positioned to become a staple for the tech-savvy generations of millennials and Gen Z who are going to treat their chronic conditions differently than older generations. Patient experience, affordability, and personalization will all be key factors that will affect the decisions of younger people.

Hims’s user-friendly app is designed to offer patients an enjoyable experience, traditionally unheard of in the healthcare industry. And this is why the app’s popularity is surging. In Q4, subscribers jumped 48% y/y to 1.5 million. Most importantly, multi-month subscribers jumped 64% y/y to 1.24 million, accounting for 83% of the total. The faster growth of multi-month subs shows that Hims is successfully attracting long-term members. This is the company’s ultimate goal, and last year’s price cuts probably helped. Q4 revenue jumped 47% y/y to $247 million, slightly lagging sub growth due to the price reductions in 2023.

Equally impressive is Hims’s operating leverage, despite the high growth rates. In Q4 2023, the gross margin remained at an all-time high of 83%, up 4% y/y. The company partners with pharmacies that deliver the prescriptions to end-users, allowing the company to avoid all the fulfillment costs, and achieve high margins. The company plans to transition the majority of fulfillment to affiliated pharmacies to further reduce its costs and pass on some of these savings to customers. This strategy can further increase customer loyalty and attract more long-term subscribers.

During Q4, Hims delivered its first non-adjusted operating profit of $1.2 million, vs. a loss of $10.9 million in the year-ago quarter. Excluding non-cash and one-time expenses, the company delivered a Q4 adjusted profit of $20.6 million, up 428% y/y. The gross margin expansion and the overall operating leverage contributed to the significant increase in profitability. This performance shows that Hims has a successful and efficient business model and an efficient growth strategy that allows it to grow rapidly and profitably at the same time.

What About Valuation

There are no publicly traded rivals, making it tricky for investors to compare Hims’s valuation to direct competitors. However, at current prices of around $14 per share, HIMS is still trading near an all-time low PS ratio of 3.4. Now that the company has proved that its business model works, the sales multiple has significant upside potential. Assuming the company continues to overdeliver in the quarters ahead and its PS ratio rises to 5x, a reasonable multiple, HIMS stock can rise 97% from current prices to $27.

What Else

While HIMS stock is still cheap, investors will punish the company if quarterly results fall short of their estimates. The stock will remain highly volatile given that the company is still small and dynamic. The competitive environment is changing, and new competitors will probably try to steal market share by offering their own personalized healthcare applications. Tech giants like Amazon or Apple are potential future competitors due to their massive user base and trove of data they can leverage to offer personalized healthcare solutions.

However, right now HIMS is by far the most comprehensive telehealth platform for chronic conditions. The company is firing on all cylinders thanks to its differentiated offering and strategic pricing actions, making its stock a strong buy.

Personal Portfolio Update

Today I increased my positions in HIMS, DKNG, MNDY, GLBE, DUOL and ODD.

HIMS & HERS HEALTH RATING

Short Term: Buy

Long Term: Buy

🎯 FY2024 Price Target: $27

I’m long MNDY, DUOL, ODD, GLBE, HIMS, DKNG.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.