2023-12-18 06:38:36 ET
Summary
- Hims & Hers is a fast-growing telehealth company with a focus on subscriptions and prescriptions for chronic conditions.
- The company's expansion into the weight loss drugs category significantly increases its total addressable market and will drive future revenue growth.
- The stock is significantly undervalued compared to peers on a DCF or comparable multiples valuation. This gap may close if the company inflects into profitability as guided in 1H 2024.
- We rate HIMS stock a BUY with a target price of $10.43.
Investment Thesis
Hims & Hers ( HIMS ) is a fast-growing telehealth company that largely makes money through subscriptions and prescriptions that treat chronic conditions. The stock has seen a 40% run up from its low two months ago, but the stock is still very cheap given their long product runway ahead. Hims & Hers recently expanded into the weight loss drugs category which significantly increases their total addressable market and their roadmap calls for further category and geographic expansion.
Hims & Hers stock trades at just 2.8x EV/TTM GP which is still very cheap for a 57% revenue grower with recurring subscription revenue, positive cash flows and a very long product runway. HIMS will likely inflect into GAAP profitability in the next three quarters, which we think will cause the stock to re-rate further upwards as more investors become comfortable with the stock due to improving financial metrics. Our base-case target price is $10.43, or 23% upside from the current price of $8.44.
Business Overview
Hims & Hers is a digital-first and consumer-first "health and wellness" platform founded in 2017 that mostly sells generic prescription medication to customers on a recurring basis. Focused on chronic conditions, Him & Hers initially started by selling erectile dysfunction drugs but has since expanded to many categories such as hair loss, skin care, mental health and recently weight loss. Customers access the platform either through their desktop, the Hims app (for men) or the Hers app (for women). While nearly all their revenue comes from the United States, they also recently expanded into the United Kingdom.
Hims & Hers offers customers several unique propositions that have driven its successful product-market fit. Firstly, telehealth is an ideal method to sell medications with social stigmas. A man suffering from erectile dysfunction often feels more comfortable speaking with a doctor remotely from the comfort and privacy of their own home. Secondly, Hims medication uses gustatory and visually appealing pills and packaging, which reduces the stigma and improves compliance. Thirdly, Hims has also embarked on a modern marketing strategy, relying on social media and influencers to market its product, enabling it to reach a younger audience that may end up as long-term customers. Finally, they offer customized medicine tailored to the individual. This means they often combine multiple medications into one pill through a process called pharmaceutical compounding, which conveniently reduces the number of pills a patient would need to take.
A Deeper Look At Their New Weight Loss Category
Hims & Hers announced their entry into the weight loss category on December 4, 2023. We are excited about this new entry due to the very large and fast-growing TAM and ability to cross sell.
A huge new TAM
Obesity is a global pandemic that is trending worse. According to the Food Research & Action Center , 47.3% of US adults are obese or severely obese, with another 31.6% being overweight. Globally, the World Health Organization estimating that obesity rates have tripled from 1975 to 2016 with 650 million people classified as obese in 2016. The number is likely even higher today. Obesity increases the risk of many debilitating diseases like cancer, diabetes, heart disease and liver cirrhosis. Facing a personal struggle with weight loss, we also know that for most people, a doctor's admonitions of "just exercise and diet more" is far easier said than done and not always realistic for many people.
The recent discovery of GLP-1 (semaglutide) drugs is a game changer. GLP-1 drugs have shown to be effective with weight loss by helping your body reduce its appetite . According to Morgan Stanley, the global market for obesity drugs (of all sorts) is expected to balloon from $2.4 billion in 2022 to $77 billion in 2030, or a CAGR of 47%. This is a stunningly high growth rate and Hims & Hers needs only to capture a small portion of this growth to justify its current stock price.
Chart 1: Morgan Stanley Research expects the market for obesity drugs to reach $77 billion by 2030
Morgan Stanley Research expects the market for obesity drugs to reach $77 billion by 2030 (Morgan Stanley Research)
Source: Obesity Drugs' Accelerating Growth | Morgan Stanley
We compare this with the global erectile dysfunction drugs market, where Hims & Hers got started and still their most profitable product. According to a Market.us study, the market is at $3.4 billion in 2023 and will grow to $6.1 billion.
Chart 2: Global Erectile Dysfunction Drugs Market
Global Erectile Dysfunction Drugs Market (Market.us)
Erectile Dysfunction Drugs Market Size | CAGR of 6.8%
According to Mordor Intelligence , the market for hair loss treatment, another early HIMS category, is currently $1.9 billion and expected to grow to $2.8 billion 2027.
The weight loss market will dwarf the erectile dysfunction and hair loss markets (i.e. Hims' original "bread and butter") by an order of magnitude and thus represents an exciting opportunity for Hims. We note that other markets Hims operates, such as cardiovascular health, are indeed also very large, with Precedence Research estimating the market to be $138 billion in 2022 . However, only the obesity drugs market is expected to grow at phenomenal rates, and HIMS has an early opportunity to get in this market. HIMS current revenue run-rate is just over $1 billion annually, so we still think a bright future lies ahead if it can capture some of the weight loss market.
GLP-1 drugs will drive interest and growth in all weight loss drugs
Most of the obesity drugs growth will likely be due to GLP-1 drugs developed by Novo Nordisk and Eli Lilly. Unfortunately, Hims is not yet offering GLP-1 drugs in their weight loss program, but 1) we think GLP-1 drugs are driving interest in all weight loss drugs and 2) Hims plans to add GLP-1 drugs in the future once shortages have stabilized and more scientific research has been conducted.
Hims has focused its weight loss efforts on drugs with longer history and cheaper costs - metformin, topiramate, Vitamin B-12, naltrexone and bupropion. GLP-1 is by far the fastest grower, but we think GLP-1 is driving interest across all potential drugs that can cause weight loss.
The quote from Fast Company bolsters this thesis:
"Dudum doesn't believe that consumers will go straight to competitors and avoid choosing Hims since it isn't yet offering Ozempic. Rather, he says the field is finally being properly acknowledged and made accessible because of the new drugs. In an early rollout, he says, demand is "way more than we expected."
A Google Trends search suggests that interest in metformin, which Hims does offer, has increased somewhat as a result of semaglutide interest.
Chart 3: Google Trends - Metformin and Semaglutide
Google Trends - Metformin and Semaglutide (Google Trends)
Secondly, Hims plans to introduce GLP-1 drugs in the future "when there is a really high quality understanding of their supply chains, when and how they should be used" according to CEO Andrew Dudum (from the same Fast Company interview). Given the significant shortages, Hims and competitors like Ro can't guarantee consistent availability of GLP-1 drugs. A previous visit to competitor Ro's websites suggested they were out of stock on GLP-1 drugs, while a more current visit indicated they have some in stock but were clear about offering refunds if there were shortages, which still suggests they are unable to consistently supply GLP-1 drugs to their consumer base at this time. Hims is taking a more cautious approach by waiting for larger supply before offering the drugs.
Financials And Valuation
DCF Valuation
Using a 5-year DCF approach we get a target price of $10.43 using the below assumptions:
Annual revenue growth rate of 33% for next twelve months that then subsequently decreases, reaching 12% in Year 5, for a 5-year revenue CAGR of 18.8%. Given their revenue growth trajectory, we think they will handily beat their 2025 guide of at least $1.2 billion. We have conservatively assumed only a modest impact from Hims & Hers' expansion into the new weight loss category.
75% gross margins in Year 5 based on their long-term guide (down from current 81%).
16.5% net margins and 22.5% adjusted EBITDA margins in the long term. The gap between adjusted EBITDA margins and net margins is currently around -9%, we expect this to shrink to -6% over time on reduced share-based compensation as a percentage of revenue. Management has guided for long-term adjusted EBITDA margins of 20-30%.
Diluted share count of 242 million shares with 3% dilution a year, leading to 280 million shares in Year 5. In calculating the current diluted shares, we include RSU's, stock options and warrants for conservatism's sake.
WACC of 12.0%, terminal growth rate of 6% leading to a terminal PE of 16.7x and no dividends. We note that a terminal growth rate of 6% is more than double the expected long term growth of US GDP, but Hims is a small-cap stock that has a very long runway for product and geographic expansion both in the weight loss category and we can easily see Hims growing at above-GDP rates for over a decade. Also, the terminal multiple of 16.7x is basically in-line with the S&P 500, even though Hims has much more potential.
Slide 1: Hims & Hers Long Term Guiding Financial Principles
HIMS Long Term Guiding Financial Principles (HIMS November 2023 Investor Presentation)
Table 1: Hims & Hers Valuation Model
HIMS Valuation Model (Analyst Calculations)
Comparable Multiples
Hims & Hers largest direct competitor, Roman Health Ventures Inc. ("Ro"), remains private. According to Sacra , Ro was last valued at $6.6 billion in February 2022 with trailing annual revenues of $300 million, or an EV/TTM Sales ratio of 22x. HIMS trades at a 2.3x EV/TTM Sales ratio, or 90% lower. Hims & Hers will not re-rate to such a high multiple because 1) late 2021/early 2022 saw exuberant valuations fueled by zero interest rates across all growth companies and 2) Ro was presumably growing faster in 2021 than Hims is growing now. However, we think the 10x difference is simply too high and that one or both valuations are wrong.
Teladoc, a giant in the telehealth space, trades at an EV/TTM Sales ratio of 1.43x but last grew revenue at 8%. Hims & Hers, by contrast, is trading at a higher EV/TTM Sales ratio of 2.31x, but last grew at 57%. On an EV/Sales/Growth ratio, HIMS is significantly cheaper.
Chart 4: EV/S and EV/S/G Ratios for HIMS and Peers
EV/S and EV/S/G Ratios for Hims Peers (Seeking Alpha, Analyst Calculations)
GAAP Profitability Guidance in 1H 2024
We also expect to see a significant valuation boost when Hims starts showing GAAP positive numbers, which management has guided for some time in 1H 2024, and as early as next quarter. In their Q3 2023 conference call , CFO Yemi Okupe states:
"As a result of these trends, we expect to generate our first quarter of positive net income within the first half of 2024. Accelerating momentum could bring attainment of this milestone as early as the fourth quarter of 2023."
In such a scenario Hims could easily re-rate to a 3x or higher EV/TTM Sales, and if they grow revenues by 33% as my model assumes, that would imply a 75% gain in one year from here. As companies inflect into profitability, they attract higher multiples because many investors and passive ETF's will only invest in profitable companies and because the stock has been de-risked.
Seeking Alpha Quant Rankings And Factor Grades
Seeking Alpha Quant Rankings and Factor Grades - HIMS (Seeking Alpha)
Seeking Alpha's factor grades show Hims scores strongly on great growth, profitability, momentum and revisions. They fare poorly on valuation, however, with a D- grade. We disagree with the valuation rating. While HIMS appears to be trading expensively on a metric like EV/FCF, we think the HIMS is trading cheaply on an EV/S basis and will quickly inflect into GAAP profitability. We expect FCF to increase multifold from here.
Negatives And Risks
We won't go too much in detail into the negatives with Hims & Hers stock as we plan to write a future article where we look in depth at the bear case. We quickly summarize the negatives below.
Firstly, Hims & Hers does not currently offer GLP-1 drugs. If Hims & Hers is too slow to launch GLP-1 drugs and thus lose share to competitors like Ro that do offer it, that would invalidate much of our thesis. Hims does not yet work with insurance providers, which may be an issue slowing Hims' adoption of GLP-1 given their current expensive nature.
Secondly, sales & marketing expenses are still too high and recent customer acquisition costs have increased. Revenue growth also slowed significantly last quarter, decelerating from 82% to 57%. If Hims doesn't reach profitability before growth slows down to the teens that may cause the stock to re-rate downwards.
Thirdly, Hims may face regulatory risk from affiliated pharmacies not being seen as independent enough.
Fourthly, Eroxon, an over-the-counter (i.e. doesn't require a prescription) erectile dysfunction topical gel, is expected to start being sold in 2025 in the US and will impact Hims & Hers' sales of erectile dysfunction drugs.
Finally, CEO and founder Andrew Dudum has vocal political views on the Israel/Palestine situation. If such views cause board members to replace him or customers to leave, that would negatively impact on our thesis. For clarity, we take no view on the Israel/Palestine situation but recognize that company leaders often must be careful about expressing political views seen as controversial to avoid backlash.
Conclusions
Despite the 40% run-up in the stock in the last two months and some risks, Hims still looks cheap from here on both a DCF valuation and comparable multiples. We are particularly excited about their entry into the weight loss category and the likelihood of inflecting into GAAP profitability in 1H 2024, which we think will drive the stock price higher. While the current stock price is much higher than our average entry price of $6.4, we are still accumulating on any dips as we think there is very strong long-term potential here.
For further details see:
Hims & Hers: New Weight Loss Category Is A Prescription For Explosive Growth And Upward Revisions