Hims & Hers Health Inc. (HIMS, Financial) has begun to attract a lot of attention from the market following its recent extraordinary performance. Year to date, its shares have already accumulated gains of more than 100%, and yet some investors remain optimistic about further upside.
Among the reasons for optimism for the company's future is the quality of its operations, which are showing significant growth, along with new avenues for expansion such as GLP-1.
Despite challenges such as heavy regulations, competition and marketing expenses, the company seems to have a bright future to generate a lot of value for its shareholders.
Business model and financial statements
Hims & Hers' business model is very attractive and is one of the main points of the thesis: The company offers solutions (which can be personalized or not) through a digital system and subscriptions. These solutions are focused on markets where there is a large contracted growth, already have a considerable addressable market and have synergies between them, making cross-selling possible.
Among them are sexual health, dermatology, mental health and weight loss, and to give you an idea, each of these has an estimated market of more than 80 million in the U.S., as well as subcategories where Hims & Hers is already present and some that should become an avenue for growth in the future.
As a result, the company's quality execution, which includes factors such as new product launches and marketing, has enabled it to reach more than 1.70 million subscribers in the first quarter, compared to something close to 748 million in the second quarter of 2022, meaning that in less than two years, the company has more than doubled its customer base. It's worth mentioning that of this total, 602 million use the personalized model and the company plans to expand this service even further in 2024.
Another factor that illustrates management's good work is the net revenue. The company has gone from total revenue of just under $30 million in 2018 to almost $900 million in 2023 and $960 million in the last 12 months.
Source: GuruFocus
This business model not only has interesting growth prospects, but it is also very scalable and is already surprising with a gross margin of over 80%, combining low cost with revenue and loyalty. Even with this great gross margin, you can see in the previous graph that the company had not yet shown positive net profit or Ebitda in 2023. This is no longer true for the most recent quarter, where better figures were shown, such as an Ebitda margin of 4.70% and an net income margin of 4%.
With this data, it is possible to infer that the pressure on the margin is coming from expenses, but digging a little deeper, you can see more than half of the selling, general and administrative costs are from marketing, which in the first quarter amounted to $130.50 million, while the total was $219 million. In addition, around $19 million of these expenses were stock-based compensation.
Source: GuruFocus
Although the stock-based compensation dilutes the shareholder and is considered an expense, it is an expense with no cash effect. Therefore, when we look at the cash flow statement, there was already cash from operations of $73 million in 2023, as well as free cash flow of $47 million.
Besides this amount is not huge, taking into account that Hims & Hers has a market cap of just over $4.60 billion, making the price-to-free cash flow ratio almost 100, it already shows the cash generation capacity of its business model even in an initial moment of margin compression to leverage revenue.
Completing the trinity, the balance sheet is also very solid, with over $200 million in cash and short-term investments and no debt, making the company able to maintain an interesting capital allocation, both by investing in the business for growth and capturing synergies, but also by demonstrating an intention to return capital to shareholders, given the $50 million buyback program.
This market isn't exactly limitless
As mentioned in the first section, the addressable market is large. It's not hard to find studies that show how quickly concern (and spending) on issues related to hair loss, anxiety or weight loss are growing, for example.
As for weight loss, one of the main triggers for the stock's recent advances was the announcement of its entry into the GLP-1 market, the drug responsible for Novo Nordisk's (NVO, Financial) success with Ozempic, while Eli Lilly (LLY, Financial) also has a considerable slice of the market, meaning that although it is a market with enormous potential, it won't be easy to compete with two behemoths of the pharmaceutical sector. According to JP Morgan, the obesity market is expected to be a duopoly between these two companies, but with some share being captured by a later entrant.
Still about JP Morgan's expectations, the projections show the GLP-1 market should exceed $100 billion by 2030, and for a company the size of Hims & Hers, even if it manages to capture something close to 3%, it would already be more than half of its current market share. Again, it's not as simple as that, the Food and Drug Administration does not review the safety of compounded products and the approval for the production of compounded versions of certain medications is for when there is a shortage in the market, which is the case with GLP-1, meaning the perpetuity of this market for Hims & Hers is still a little unclear, although the CEO has shown optimism by stating that customers will have access to a “consistent supply of the compounded medications.”
Among the main risks are competition and regulation, not only in the GLP-1 market, but in others in which Hims & Hers is present. The company is still in the process of developing some moats, such as its relatively large subscriber base, brand awareness and affordable prices, but there is a possibility that new entrants will threaten this market and cause the need for increased marketing spending to be maintained or a price fight to occur.
The math behind it works
The guidance for 2024 is strong, targeting revenue of $1.20 billion and Ebitda of $120 million (both at the bottom of the guidance). With this figure alone, we would already have an enterprise value-to-Ebitda ratio of 36, a level that sounds reasonable for a company with all these growth prospects.
The company will offer GLP-1 from $199 per month, which means that if it managed to achieve 170 million in this service (10% of its base), it would already mean an increase in revenue of $400 million per year. To take a more conservative figure, let's say that in 2025, the milestone of $1.44 billion in revenue is reached, which means a 20% increase on the 2024 guidance.
According to the company, the long-term adjusted Ebitda margin should be somewhere between 20% and 30%, given all the efficiency that needs to be captured. So I do not think it's crazy to imagine that at some point in the next few years, this Ebitda will be $300 million (a margin of 21% and revenue of just over $1.4 billion would be required). At that level, the company would be trading at an EV-to-Ebitda of 14.50.
Even if it reaches this level, it's only a small portion of its full potential, given its many avenues for growth in booming markets, combined with those internal initiatives that should unlock shareholder value, such as operating leverage that should allow for a reduction in marketing expenses (in relation to net revenue) and the like. In other words, there is a lot of upside risk.
Hims & Hers seems to be a great opportunity
As noted above, the company has several interesting growth avenues, not only with its existing business, which has excellent rates of return, but also other avenues just as powerful (perhaps more so), such as GLP-1. It is also trading at an attractive level, making it possible for the recent valuations to continue, but only if the scenario where good execution materializes, which seems plausible to me.
Despite this, I believe the thesis is far from being a no-brainer. There is a high degree of complexity as well as risks that must be closely monitored, such as regulation in this sector, which is heavy, as well as competition with large and new players.
To sum it up in one sentence, though I believe there is high potential, there is also a certain speculative nature to the thesis. For this reason, the ideal is to have a good mix of Hims & Hers in the portfolio, together with careful monitoring.
