2023-10-24 22:44:43 ET
Summary
- Hims & Hers Health offers personalized and customized telehealth services, specializing in niche treatments for hair loss, erectile dysfunction, skincare, acne, and mental health.
- The company has experienced impressive revenue growth and margins, driven by online sales and a growing subscriber base of over 1.3 million customers.
- Hims & Hers Health is investing in AI and data analysis to enhance personalized treatments and is exploring new market opportunities, such as weight management.
The telemedicine market saw an explosion during the COVID-19 period but has managed to maintain a significant market share even in the post-pandemic period. Hims & Hers Health, Inc. ( HIMS ) fits into this highly competitive context with the particularity of offering personalized and customized services on the market as well as niche and specific services. Another very interesting element concerns the transversal sale of products/services which will be the challenge for HIMS to overcome in the coming years. Impressive growth rates in terms of revenue and margins (which, however, are still negative) are counterbalancing the competitive pressure on prices very well and currently define HIMS as a very attractive investment. My rate is Buy.
Overview
Hims & Hers Health is a US telehealth company that offers a range of online health products and services, including treatments for hair loss, erectile dysfunction, skincare, acne, and mental health. The company was founded in 2017 by Andrew Dudum and Ofer Israeli and is headquartered in San Francisco, California. The company went public in 2021.
Among the services that characterize Hims, are the treatments for hair loss (finasteride, minoxidil, and micro-needling), erectile dysfunction (sildenafil, tadalafil, and vardenafil), skincare, acne (tretinoin, clindamycin, and azelaic acid) and for mental health (online therapy and psychiatric counseling)
The advantages offered by the company and recognized by the market are flexibility (patients can access healthcare services from anywhere), discretion (patients do not have to see a doctor to access services), and affordable prices.
The company has over 1.3 million customers and offers its services throughout the United States.
Hims & Hers Health is subject to healthcare and pharmaceutical regulations in the United States and other countries in which it operates. The company works closely with medical professionals and pharmacists to ensure the safety and effectiveness of its services.
Highlights and Financial
New market trends
The market is moving from generic to personalized treatments
Listening to the latest earnings call we can learn that over 35% of online revenues come from personalized treatments and that in the hair sector, 80% of new subscribers have requested a personalized treatment. The company is therefore specializing in a niche sector of personalization of care as if a 'one to one' precision medicine treatment was underway (with specific doses, forms, and compositions) but with optimized scale management (in terms of treatment offered or the mix varies but not the general recipe)
Use of AI and analysis of large amounts of data
Personalized treatments are proposed and managed through a preliminary study carried out following massive processing of large quantities of data collected from suppliers and customers and also through treatments carried out in the past. The company is developing a proprietary platform called Med Match based on the use of Artificial Intelligence.
Cross-selling on an already active customer base
Customers increasingly require access to transversal personalized treatments, i.e. those capable of solving multiple problems at the same time. This is a great opportunity for companies in the sector in terms of up-sell and cross-sell potential by intervening with a well-diversified portfolio of services offered and offering real added value to the existing customer base.
Hims and new developments of services offered
The company is characterized by a great spirit of innovation and expansion into new market niches using the proven and existing platform. A major area of intervention for next year will be weight management which represents a huge market opportunity allowing us to exploit all the strengths of the current company organization with personalized treatments through advanced pharmaceutical know-how.
Revenue and Margins
Revenue in Q2 -23 grew 83% year over year to $207.9M. Revenue growth was primarily driven by online sales which increased 87% year-over-year to $201.2M. The continued addition of subscribers to the platform has been the main driver of online revenue growth. The number of subscribers grew 74% year-on-year to 1.3M people.
The trend of the Gross Margin has been continuously growing since 2018 and reached the maximum peak of 80.3% in 2023. This result is probably due to the achievement of important economies of scale. If we look at the data at the Quarter level, Q2 grew further with an 81.8% margin.
Listening to the latest Earnings call :
Gross margin expansion was the result of lower product costs, increased efficiency across our provider base, a move to longer-duration subscriptions, and improved efficiency from a migration toward affiliated pharmacies. These dynamics more than offset degradation from our strategic pricing actions.
We can also note that there is a strategic trade-off between the savings generated by economies of scale and the action of reducing prices to maintain market shares and/or attract new customers.
The action underway on sales prices is also accompanied by heavy investments in marketing (where most of the company's profits are diverted)
Regarding marketing expenses, these represent 51% of Revenue and the company made them stable in Q2 when compared to sales. This means that in absolute terms they are growing and also that the competitive arena requires very intense attention and pressure not only on new products :
Customer acquisition was slower at the start of the quarter, as a result of those dynamics in a somewhat more challenging marketing environment, relative to the first quarter. We expect that investments made at the end of the second quarter will provide a meaningful customer acquisition tailwind in the third quarter.
Marketing investments are however driven by a corporate payback strategy in 12 months and this could represent an analytical element that precludes excessive risks in company accounts.
Turning to adjusted EBITDA this turned positive in Q4 22 and increased by 73% compared to Q1 reaching $10.6M in Q2. The trend of this indicator underlines how the company strategy of reducing market prices is not, at the moment, impacting margins.
The EBITDA outlook for 2023 has been raised to $40M and this implies that Q3 and Q4 can bring a similar contribution to what occurred in Q2 ($10M). This outlook which would appear to be pessimistic (given the 2023 trend) takes into account a negative impact of around $12M due to the downward changes in sales prices and this once again underlines the strong competitive tension of the market but the company strategy it seems clear :
We believe these strategic moves will drive both stronger retention and acquisition dynamics in the future as customers can access a unique and differentiated set of solutions on our platform that are less readily available with standard generic solutions.
We have high conviction that gains in efficiency from strong execution and economies of scale will enable us to continue to expand our adjusted EBITDA margins over time.
The company is also investing significantly ($7.8M TTM) with high growth compared to existing depreciation. The Capex/Depreciation ratio in Q2 was 1.77 and this identifies a clear growth strategy in investments in structures.
In terms of liquidity, the company can count on cash of $193M with an operating cash flow capable of being greater than capital expenditure.
Lastly, a practically zero corporate debt profile must be highlighted and this further strengthens the company balance sheet.
Peers and Valuation
Hims & Hers Health has several competitors in the telemedicine and online wellness space that offer similar medical and wellness consultation services through digital platforms. The following companies were selected for this analysis:
• Teladoc Health, Inc. ( TDOC ): is a leader in the telemedicine industry and offers a wide range of virtual medical services, including online doctor consultations, psychological counseling, and wellness programs.
• GoodRx Holdings, Inc. ( GDRX ): This is a platform that helps patients find drugs at discount prices and offers drug cost consulting services. While it does not offer direct medical advice, it is a relevant platform in the healthcare sector and can be used as a market reference.
• Beam Therapeutics Inc. ( BEAM ): is a biotechnology company that focuses on the design and development of gene therapies. While its focus is different from Hims & Hers Health, it is part of the healthcare sector and can be considered a competitor in terms of investment.
It is important to note that the telehealth and online wellness industry is rapidly growing and constantly evolving. Competition is intense, with numerous companies trying to distinguish themselves through a wide range of services and business models.
Using Seeking Alpha Rantings we can see how GDRX has the best rating [BUY] while the other companies have a neutral verdict.
Going into the merits of the evaluation elements, HIMS is penalized by the worst rating in terms of price and this is probably the only element that does not trigger the Buy rating in the general evaluation because it records the best growth rate and also the best rating in the EPS Revision. In profitability and momentum, it is second to GDRX which seems to be the best investment solution.
Also looking at the market price trend in the last year we notice that HIMS is the one that has appreciated the most (48%) especially compared to GDRX (16%) which could still have room for growth in price if compared to HIMS .
Price share valuation
HIMS is expected to become profitable within the next three years and therefore valuation metrics based on EPS (which are negative today) may be misleading. Proceeding with a relative price evaluation, I add a further element of comparison, in addition to the previous ones, with the following company:
• 1Life Healthcare, Inc. (ONEM): Operates through its One Medical Healthcare brand. The company offers primary medical care services based on telemedicine and an integrated care model.
Using the main price ratios and observing the following graph which shows the comparison both with the identified peers and with the reference industry:
In terms of Price to book Hims is the most expensive with 4.1, double compared to an average of 1.9 for peers and 2 for the entire reference industry. Looking instead at the price to sales Hims with 1.8 becomes highly attractive when compared with peers whose average is 6.4 and not too far from the industry which has 1 as a reference parameter.
Wanting to give greater emphasis to sales in this phase of the company's growth we could say that the current market price of HIMS is sufficiently attractive to consider a long entry.
Risks
Although HIMS is implementing a strategy of specializing its market offerings, which makes it unique in the various market niches it is pursuing, we must underline how competition in telemedicine is highly pressing. We have also seen this in the company's need to rebalance sales prices downwards to maintain market shares and this pressure could lengthen company profitability times or even sustainability if the trade-off between marketing expenses and revenues does not reach an acceptable level. The highest risk, in my opinion, is precisely that of seeing the growth in margins fade due to too high competitive pressure on prices.
Conclusion
Hims & Hers Health, Inc. represents a healthcare company experiencing very strong growth in both revenue and operating margin. Full profitability should arrive within 3 years and the strategy adopted by the company in terms of offering customized services seems to be bringing great growth results. Marketing expenses are currently aimed at investments for the long-term retention of the customer base and the results also concerning competitors will only be seen in the next quarters. However, the financial foundations are very solid and there are no impediments to thinking that the growth path could be interrupted. My rate is buy.
For further details see:
Hims & Hers: Specialization Is The Secret To Great Growth