2024-01-10 06:24:47 ET
Summary
- Hims & Hers Health exhibits impressive revenue growth, defying market predictions in 2022 & 2023.
- The company operates as a versatile tele-health platform, offering a range of healthcare services and personalized treatment plans.
- Despite potential risks, such as competition and valuation concerns, HIMS has shown resilience and potential for sustained growth.
- HIMS's management expresses confidence in achieving positive net income in H1 2024, signaling optimism about stabilizing marketing spend without hindering profitability.
- Analysts currently anticipate an EPS of -0.06 for 2024, but the potential for positive surprises in the Q4 earnings call could lead to upward revisions in EPS targets.
Investment Thesis
In the ever-shifting landscape of the stock market, success requires adapting strategies to the prevailing conditions. If you've been riding the waves with Hims & Hers Health ( HIMS ), you've likely seen notable gains, particularly in the latter part of 2023. The bear market favoured the patient accumulator, but as we step into 2024 with bullish sentiments, a different approach is in order.
Despite Hims & Hers nearly tripling from its all-time low, I find it still worth considering. This time, the strategy isn't about buying low; it's about adopting a "Buy high, sell higher" mindset. In this article, we'll take a practical look at why it might still be a buy, even at current levels. Our analysis will fuse macroeconomic trends, fundamental indicators, and technical analysis to identify potential entry points for the year ahead.
Introduction
In the realm of virtual healthcare, Hims & Hers Health Inc. stands out as a 100% online platform, bringing licensed healthcare professionals within easy reach, no matter where you are in the United States.
Specializing in a range of health areas including sexual health, skincare, mental health, and hair care, Hims & Hers simplifies the healthcare journey. Through a straightforward online process, users can connect with licensed medical professionals. These professionals can recommend personalized treatment plans, including prescription treatments if needed, all conveniently shipped to your door.
Despite its modern approach, the stock sometimes grapples with a common investor misconception. It's occasionally misunderstood as a pharmaceutical entity exclusively focused on erectile dysfunction medications, causing Hims & Hers's broader identity to be overlooked. However, beyond this narrow perception, Hims & Hers Health Inc. truly shines as a versatile tele-health platform, using technology to reshape the healthcare experience.
Exploring Hims & Hers in the Macro Trends: Unveiling the Big Picture
Hims & Hers stock faced a significant decline in 2022- 2023, much like many other stocks in the market, due to widespread macroeconomic concerns. There were fears of potential drops in revenue and memberships across the board. Surprisingly, the company defied expectations and continued its growth trajectory. While it can be argued that the consumer confidence didn't deteriorate as a result the company didn't experience the recessionary impact projected for 2023. It's essential to note that the company operates in a sector typically resistant to recessionary pressures.
The nature of Hims & Hers Health's offerings in sexual health, hair care, skin treatments, and the newly introduced weight loss segment makes it unlikely for customers to discontinue their treatments for long time. These services directly impact their quality of life, and the discreet online platform caters to those seeking personalized medications, further securing customer loyalty.
Even if we hypothetically entertain the idea that Hims & Hers might be adversely affected during a recession, it's crucial to assess the broader macroeconomic landscape. Currently, the macroeconomic indicators in the U.S. appear positive: inflation is under control, expectations for inflation remain stable, consumer confidence persists, and job loss rates remain low. The market outlook suggests a probable smooth landing as the most likely outcome. I concur with this analysis, and in comparison to 2022, the macroeconomic conditions seem better positioned. Additionally, there's an expectation of interest rate cuts , a conservative estimate placing them at 3-4 percent. So much like any other stock Hims & Hers is also destined to get the tail wind from Macro environment.
Breaking Down Hims & Hers: Understanding the Core Fundamentals
Take a glance at the chart below—it tells a compelling story of Hims & Hers Health's soaring revenue . What's interesting is that, even as revenue surges, the cost of revenue stays steady, leading to a gradual climb in gross profit.
Now, let's focus on 2022 and 2023, years when the market was predicting a revenue dip. Contrary to expectations, Hims & Hers not only held its ground but showed impressive performance. This graph highlights their knack for managing costs and making strategic moves, making them stand out in the industry.
Quarterly Revenue Growth (Author)
While the revenue graph paints a positive picture, it's essential not to overlook certain metrics that contribute to Hims & Hers's unprofitability. The graph below lays out why this remains a challenge. The SG&A (Selling, General, and Administrative) expenses are on a swift upward trajectory, causing a contraction in both EBITDA and net income . Notably, the rise in R&D spending isn't proportionate to the surge in SG&A, shedding light on a critical aspect of company's financial health.
A major contributor to escalating SG&A is the hefty investment in marketing. While this spending is justifiable for a company aiming to expand its customer base, the bear case revolves around the stickiness of this customer base. Intriguingly, Hims & Hers doesn't disclose its churn rate, leaving investors to ponder the loyalty of its members. For a company dealing with conditions that aren't life-threatening but chronic, it's possible that patients may pause their treatment temporarily, sign up again, but are less likely to shift to another platform.
So, while the argument for Hims & Hers being recession-resilient holds, the concern about a potentially high churn rate is plausible. However It's crucial to acknowledge potential risks in the bullish thesis. One notable aspect is the correlation between marketing spend and the company's rapid growth. While reducing marketing expenses might not necessarily lead to a proportionate reduction in revenue growth, there's a risk that growth could decelerate. The question arises: Can the company sustain such robust expansion without significant marketing investments? In the third quarter of 2023 , the company successfully cut marketing expenses by 300 basis points, bringing the current marketing expenditure to 51% of the total revenue.
Management remains optimistic and has expressed confidence in the ability to achieve positive net income in the first half of 2024. This sentiment was evident in their comments during the Q3 Earnings call. While acknowledging the potential risk, the management's strategic outlook hints at a belief that reducing marketing spend won't impede the company's trajectory towards profitability. It adds an element of caution to the narrative, prompting investors to scrutinize the delicate balance between sustained growth and prudent cost management.
Hims & Hers maintains a favorable cash position relative to total current liabilities, as illustrated in the graph below. This underscores the management's prudent risk management practices, suggesting it could be a proactive measure.
Valuation
While Hims & Hers Health Inc. might have been a steal during the market lows last year, arguing for its current affordability becomes less straightforward when we look at valuations. Investing in a bull market calls for a strategic approach. Buying stocks at lower valuations in a bear market seems wise, but as the market swings upward, sticking to stringent valuation criteria might lead to friction.
Rather than fighting against the market's trend, a prudent investor adapts to the multiples the market assigns to a stock. Maintaining a safety margin is important, but it's also crucial not to miss out on promising opportunities just because the valuation is no longer as wallet-friendly as in the bear market.
As Hims & Hers continues on its journey towards GAAP profitability, traditional value assessments may not fully capture its investment appeal. The Quant rating below categorizes Hims & Hers as a Hold, with the primary factor influencing this rating being its valuation. Notably, EV/Sales ((TTM)) and EV/Sales ((FWD)) receive a favorable B rating, indicating a more than 40% discount compared to its sector median. However, the story changes with EV/EBITDA, earning a D-, significantly exceeding the sector median. This discrepancy can be attributed to Hims & Hers's substantial marketing expenditures, impacting its current EBITDA generation.
Quant Rating (Seeking Alpha) Valuation Grade (Seeking Alpha)
Looking at Price/Sales, both forward and trailing twelve months, Hims & Hers appears more than 40% cheaper than its sector median. Examining historical price action further adds to the narrative, portraying a tale of undervaluation. The stock still lingers below its IPO price and sits 65% lower than its all-time high, indicating a potential value proposition at its current level.
If Hims & Hers effectively maintains the stability of its marketing expenditure as a percentage of revenue, redirecting its focus toward robust EBITDA and cash-flow generation, its valuation could significantly improve. The management is actively steering the company towards this objective, emphasizing a clear path to profitability. Notably, Hims & Hers has consistently outperformed its own guidance, instilling confidence in its strategic direction. However, estimating a fair value for the company remains challenging until it achieves sustained profitability.
During the Q3 earnings call, the CFO offered a positive net income guidance for the first half of 2024. Analysts currently anticipate an EPS of -0.06 for the entire year of 2024. However, there is potential for a surprise in the Q4 earnings call, leading analysts to potentially revise their EPS targets for 2024 upward.
Risks in Hims & Hers's Competitive Landscape:
Hims & Hers faces a notable competitive risk as its business model could be replicable for other pharmaceutical companies. Recent entries into the arena, such as Eli Lilly's new website, offer a similar solution for a few conditions. These contenders provide independent tele-health providers for consultations and prescriptions.
Yet, history in other sectors has shown that legacy companies often struggle to compete with disruptors. The risk for disruptors like Hims & Hers typically arises from new entrants attempting to replicate their success. However, this threat often takes time to materialize. Matured companies attempting to adopt a similar business model as disruptors often face challenges and may find themselves on a downward trajectory.
in addition, the technology infrastructure supporting Hims & Hers' platform, including secure online consultations and prescription fulfillment, represents a significant investment. Replicating this technology and ensuring a secure and compliant platform requires substantial resources and expertise. Hims & Hers has demonstrated a commitment to innovation by expanding its services. Staying ahead in the tele-health industry requires continuous innovation and adaptation to changing healthcare needs, which may be challenging for newcomers to match.
Exploring Technicals: Navigating Hims & Hers through Charts and Trends
Hims & Hers's technical analysis on yearly chart indicates a critical juncture as it currently rests on a significant support level, precisely aligning with the 200 Day moving average, which serves as a robust support zone. The stock's descent to the 200 Day moving average was triggered by a shift in macro sentiment, specifically a recalibration of expectations for a rate cut in March & Eli Lilly website launch. Notably, the volume profile highlights substantial volume support in this zone, indicating a significant accumulation of shares.
Despite the recent adjustments in market expectations, it's noteworthy that the stock is trading above all three moving averages, signalling the continuation of its momentum. The resilience of Hims & Hers above the 200 Day moving average on 1year chart suggests a favorable technical outlook. Considering the broader macroeconomic landscape, the current market realignment in rate cut expectations is not indicative of a negative trend. The overall macro outlook remains positive, with indications of a smooth landing, particularly emphasized by the recent JOLTS report showcasing the resilience of the job market. Given these factors, the likelihood of Hims & Hers breaking below the 200 Day moving average and entering a declining trend seems improbable at this juncture.
Bollinger Band & MACD (Trading View)
However, the stock is exhibiting uncertainty on the monthly charts, with the Bollinger band indicating consolidation through a squeezing pattern. Contrarily, key indicators like RSI and MACD suggest a deceleration in bullish momentum. The weekly chart presents a more bearish outlook, supported by indicators and Fibonacci levels indicating a potential downside. I'll be closely monitoring the stock this week before initiating any action. It's crucial to recognize that charts serve as confirmation tools, not prophecies. Upon amalgamating all three analyses, my overall stance is bullish, anticipating the Macro and fundamentals to drive the stock upward post the Q4 earnings.
I'm using stop-loss and trailing stop orders to protect my investment in the buy high sell higher strategy. With a core long position in place, these risk management measures are essential to handle potential downsides in this trade. They work as safeguards, automatically selling the stock if its price drops to a specific level. This disciplined approach fits the buy high sell higher strategy of taking advantage of upward momentum while actively managing and reducing risks tied to market changes.
Risk to my Thesis
As I embark on this trade and invest in Hims & Hers at current levels, it's important to acknowledge the inherent risk of potential capital loss. Numerous factors could potentially impact the success of this trade, and I'm actively monitoring several key risks to assess the appropriateness of continuing with a strategy of continuous accumulation:
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Macro-Economic Factors: Given the buy high sell higher strategy, changes in the broader economic environment, such as shifts in interest rates prediction, inflation, or overall market trends, could influence investor sentiment and affect Hims & Hers's stock performance. While stop-loss and trailing stop orders provide a safety net, the primary objective is to minimize the risk of any capital loss.
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Regulatory Changes: The tele-health sector is susceptible to regulatory shifts, and alterations in healthcare policies might have implications for Hims & Hers's operations and profitability. Vigilantly tracking regulatory developments remains crucial.
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Competitive Landscape: The possibility of new entrants or strategic shifts by existing competitors poses challenges. Hims & Hers's replicable business model makes it vulnerable to increased competition.
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Execution Risks: The successful execution of Hims & Hers's business strategy is paramount for sustained growth. Any missteps in operational execution or failure to meet market expectations could impact stock performance.
To navigate these risks, my approach involves continual monitoring of market dynamics, staying abreast of industry changes, and adapting my investment strategy as needed. A proactive stance, coupled with effective risk management through stop-loss and trailing stop orders, forms the foundation of my strategy to enhance the potential success of this investment thesis. If the stock falls below your stop loss, leading to an exit. It's wise to refrain from re-entering the same trade without a thorough analysis of why your initial thesis faltered. However, my plan is to maintain a small core position in Hims & Hers unless there's a significant change in the fundamental story.
Conclusion
In conclusion, while recognizing the potential risks associated with my investment in Hims & Hers, I remain committed to a strategy of continuous accumulation. The proactive integration of risk management measures, including stop-loss and trailing stop orders, aligns with my objective of minimizing capital loss. By staying vigilant to market dynamics, regulatory changes, and competitive shifts, I aim to navigate potential challenges and enhance the prospects of a successful investment thesis.
For further details see:
Hims & Hers Health: Unleashing Macro Momentum - Investing In Growth At A Higher Multiple