2023-10-25 09:32:21 ET
Summary
- Hims & Hers is a potential multi-bagger investment with strong growth potential and an attractive valuation.
- The company's subscription business model allows for compounding revenue over time, strong customer retention, and strong brand equity.
- Hims & Hers is growing its market vertically and horizontally, adding new supplements and treatment areas regularly.
- HIMS is valued at a song when compared with its growth potential.
- We Rate HIMS a "Strong Buy"
Finding multi-bagger stocks is a tough business.
The conditions needed for a company to consistently grow revenue and earnings over time while keeping share count in check are not easy to replicate, which is why so few stocks go on to earn thousands of percent over any period of time.
However, today, we think we've identified a potential opportunity in this realm - Hims & Hers Health ( HIMS ).
The company is growing like a weed, with a massive market opportunity and solid execution to boot. Having recently turned the corner on FCF profitability, we think the stock is ready to re-debut onto the market with an entirely rebuffed image.
Today, we'll be breaking down the top three reasons why it could be time to buy into this potential multi-bagger investment.
1.) HIMS's Economics
Subscription businesses are the best. Why? Because you can do a linear amount of marketing while compounding revenue over time.
Think about this from the perspective of a business owner.
If you sell a customer something on day 1, they're a customer once.
If you take that same amount of effort and sell a customer a subscription, they're a customer over and over - but the upfront investment of turning them into a customer is the same. This is very powerful from a compounding perspective, which is why subscription businesses are so popular nowadays.
HIMS is a novel subscription business. Have a look at this slide from HIMS's recent earnings presentation:
On the left, you can see how quickly the company has been increasing subscribers. In blue are single product subscribers, and in green are multi product subscribers.
In case you weren't aware, HIMS is an online health platform selling subscription medications and treatments for everyday health issues, like hair loss, erectile dysfunction, birth control, and more.
First, the bad news - HIMS's customer acquisition cost is high and growing. Last quarter, CAC remained in the multi-hundreds of dollars per person.
But here's the thing - once someone is in, they are in , so to speak. By servicing demand for embarrassing or overlooked health conditions and making it easy to get treatment, HIMS's product suite does an incredible job at retaining subscribers and building up a moat vs. the traditional medical establishment.
In addition, HIMS claims to have sub-1 year payback periods on marketing spend:
Here's how that buttresses the multi-bagger thesis.
In short, buying decisions are built on trust. When someone enters the HIMS ecosystem, they are usually taking a shot that the company will be able to solve a narrow problem - let's say it's around hair loss.
When a subscriber achieves a solid outcome (as a result of the company's prescription medical offerings), they're more likely to trust the company around another narrow issue, and so on, and so on.
Thus, revenue grows from two angles - the land as well as the expand . This is how HIMS scales.
Plus, the best thing about medical conditions is that they typically don't go away, either. Hair loss is permanent unless you keep taking finasteride / minoxidil. Birth control is typically a long-term choice for women who go on it as young adults. Erectile dysfunction can be a lifelong condition.
As a result, HIMS ends up with a very strong revenue growth proposition from both angles that has a tremendous opportunity to scale.
2.) Massive Market Opportunity
As HIMS adds more health verticals to the mix, the opportunity only grows further.
Right now, the company services a few verticals, including:
- Men's health : Erectile Dysfunction, Premature Ejaculation, and Overall Cardio.
- Women's health : Birth Control, STD's and Libido.
- Dermatology : Hair Loss, Acne, Aging.
- Mental Health : Anxiety, Depression.
While it's a relatively narrow list, the customers helped by the solutions Hims's sells could definitely be considered a 'starving market'.
However, check out what the company has in the pipeline:
Management is looking at further expansion into more verticals, like Testosterone, Eczema, Insomnia, Weight Management, and more. All are being explored by the company, which is great considering that these issues all have absolutely massive potential markets.
Plus, remember how we mentioned the Land & Expand model HIMS is using?
They're using it to expand each vertical they operate within. Having hair loss issues?
Don't worry - you can now get your prescriptions and your accessories / supplements from the same place (see on the right hand side):
By branching out into adjacent supplements, HIMS is working to massively increase user lifetime value, which is great.
Reviews are strong for the company's products as well.
Finally, of note, the company is expanding more into the 'traditional' sphere by offering primary care telehealth services to its large, growing subscriber base:
This new virtual experience totally circumvents the modern health system, including insurance. Plus, it's extremely cheap & convenient :
There are two costs to keep in mind: The cost of the primary care visit and the cost of any prescription medication, if your provider determines it’s appropriate. The cost of the primary visit won’t be covered by your insurance, and is $39. The cost of the prescription may be covered by your insurance when you pick up the medication at your local pharmacy. Just provide them with your insurance information as you would when picking up any other prescription.
For the first time, handling all but the most pressing, dangerous, or specialty diseases and injuries may become as easy as shopping online - something we're all familiar with.
All in all, the company is rapidly expanding the markets it serves both vertically and horizontally. The drive to grow customer LTV looks to be paying off, and there's the attached call option of re-inventing primary care.
3.) Room For Multiple Expansion
While the business economics are enticing, the best thing about this story - in our mind - is the multiple.
When investors earn huge returns on a stock, often the majority of the gains have to do with the multiple rocketing higher.
Sure, a company's underlying business can increase rapidly, but oftentimes the biggest gains are made when multiples expand as a result of market speculation and optimism.
Right now, HIMS is relatively undiscovered. In fact, it's being actively shorted by Spruce Point capital - you can see their opinion here - and sentiment is negative due to the aforementioned high acquisition cost.
However, to us, this means there's a significant opportunity here.
Revenue continues to grow, and TTM FCF has finally turned green, which is an incredibly positive development:
That said, the key here is the low sales multiple:
Trading at only 1.78x sales, HIMS looks to be an incredible bargain when compared with its potential.
Nominally, the company is cheap vs. the average stock in the S&P 500, which trades at >2x sales.
For a potential 'Netflix ( NFLX ) of modern health', this simply seems cheap.
Should the multiple come into line with many of the other high-growth companies that are on the market trading at 10x sales, the company already stands to be a multi-bagger, even without seeing extra gains in the underlying financials.
Risks
While we're bullish on HIMS, there are some potential risks.
First, earnings are November 6th, which is a clear event risk. Should results miss the mark, or if the reaction to the numbers is poor, then the stock could continue along getting pummeled:
This is entirely plausible.
Additionally, the company is not particularly well insulated from threats.
Spinning up a Hims-style business is not legally or operationally challenging, and it's feasible that a well-capitalized and motivated team could pull it off.
This is why, in our opinion, the company is spending beyond its means to acquire customers now while they have a first mover advantage.
The technology behind Uber ( UBER ) isn't groundbreaking, but the strength of the company's network effect - that now insulates it from competition - is.
If the company continues to execute, we think it's possible that HIMS could achieve something similar.
Summary
All in all, we really like the contrarian position here on HIMS.
The company has a number of compelling reasons to buy the stock, and we think that HIMS's best days could be in front of it, despite the challenges and risks.
The risk reward seems skewed to the upside in light of the continued product expansion, growing subscriber base, and secular advantages vs. traditional medicine.
We rate HIMS a "Strong Buy".
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Cheers!
For further details see:
Hims & Hers: 3 Reasons To Buy This Potential Growth Stock