2023-08-15 08:09:59 ET
Summary
- HIMS & Hers Health is performing well, beating guidance and recording positive developments in most metrics.
- The company is cash flow positive, debt-free, and experiencing peak popularity among search engine users.
- My updated DCF model indicates over 3.4x potential from current levels, signaling a buying opportunity.
Back in December, I presented Hims & Hers Health, Inc. (NYSE: HIMS ) as one of my top ideas for 2023. Since then, while the share price soared in H1’23, it pretty much retreated to the same level as of the time my initial article was published.
However, businesswise, HIMS seems to be doing great – beating guidance has become a norm and positive developments are recorded in most metrics. The company is cash flow positive this year, while debt-free. At the same time, popularity amongst consumers seems to be at its peak, judging by data from Google Trends. In terms of valuation, my updated DCF model indicates more than 3.4x potential from current levels.
Operational overview
Q2’23 marked yet another quarter of superb performance by HIMS. Revenue came at US$207.9M (+83.1% YoY), beating both market expectations of US$205.0M and management’s guidance of US$200-205M. The core online segment contributed US$201.2M (+87.2% YoY), while the wholesale channel added US$6.7M (+10.4% YoY). While the latter is not a main part of the business and is rather a brand-building tool, the return of growth there is a positive sign.
HIMS' growth trajectory (HIMS)
The gross margin continued to improve and reached an impressive 81.8%, marking an improvement by additional 5% compared to last year. The continued improvement in HIMS’ gross margin demonstrates the ability of the business to deliver economies of scale, but I expect it to fall back into the mid-70s as management is targeting. Slight reductions in the margin could be seen as early as Q3, since the company is intending to reduce prices of some of its products, in order to deliver better customer experience.
As part of this mission and our ambition to reach as many people as possible, we're excited to share that in the past few months we've begun to systematically lower prices for many of our longer duration offerings to make our more personalized subscriptions even more mass market accessible.
- Andrew Dudum, CEO of HIMS
Key metrics (HIMS)
It’s important to note, that the growth was fueled by both higher number of orders (2.1M; +52.3% YoY) and growing average order value (AOV) of US$95 (+21.8% YoY). The biggest element of OPEX – marketing expenses came at US$107.2M or 51.6% of revenue, marking an improvement from last year’s 53.3%. A continuous improvement in this metric will be key for HIMS going forwards, as I think the primary reason why the stock is not given enough credit by investors is the doubt of getting marketing expenses under control, without a bit hit on growth. So far, HIMS seems to be doing fine with the reduction of marketing expenses as a % of revenue. While the company recorded a net loss of US$7.2M, adjusting for stock-based compensation of US$16.8M and Depreciation of US$2.4M alongside other minor corrections led to AEBITDA of US$10.6M, compared to negative US$7.5M a year ago.
The financial position of HIMS is solid with no IB debt and over US$193.1M of cash and equivalents and short-term investments, compared to US$179.6M at the beginning of the year. The business generated US$26.3M of net operational cash flow, compared to negative US$25.8M a year ago. At this point, I think that given the financial position of the company and it being cash flow positive substantially reduces the risk of future dilution through equity offerings.
Updated guidance
The impressive results in Q2’23 have led to management updating 2023 full year guidance by bumping the revenue range by US$20M to US$830-850M. AEBITDA expectations were also raised to US$35-40M from US$25-30M. Note, that since going public, HIMS has always delivered AEBITDA towards the upper guidance point or more often exceeded it.
HIMS' AEBITDA Guidance vs Actual (in US) (HIMS data; compiled by the author)
At this point, I wouldn’t be surprised if towards the end of the year HIMS reached GAAP profitability, given the development trajectory of the business.
Customer-focused business
The quality, which I think is at the core of HIMS’ success so far, is its customer-focused business model. This allows the company to grow, retain the majority of its subscribers and build its brand, which eventually should lead to much lower marketing expenses as a percentage of revenue. Something like the strategy Amazon ( AMZN ) used to become the platform of choice for billions of people.
4 pillared customer-focused strategy (HIMS)
While I’m not saying that HIMS will be the Amazon of healthcare, the opportunity of digitalized medicine is huge and as one of the early entrants HIMS could capture a substantial portion of the market. The company is slowly but surely expanding the range of services/products it offers to its clients, without breaching into heavily regulated substance.
HIMS popularity amongs search engine users (Google Trends)
Data from Google Trends indicates that the popularity of HIMS amongst US-based search engine users is at ATH, which could eventually translate into fuel for further revenue growth.
Valuation discussion
I didn’t make any significant changes to my previous DCF model, other than using the 10-year bond yield as a risk-free rate and the most recent equity risk premium (for August), calculated by Damodaran . Also, the net cash position was adjusted as of Q2’23, including also the short-term investments, as their purpose is purely to earn interest and are not part in any way of the actual business. The resulting FV estimate of US$24.65/share, presents a nearly 3.4x opportunity from the current market price.
DCF valuation (author's own assumptions)
Such a large discrepancy could be attributed to a few factors. An obvious one is the fear of competition. So far, HIMS seems to be staying ahead of it and maintains a quite high growth rate. For comparison, another telehealth provider – Teladoc ( TDOC ) has seen its growth tank . Another reason could be the overall risk-off environment, fuelled by raising interest rates. Now that the tightening cycle may be coming to an end, this may reverse. Fundamentally, I think that HIMS is quite cheap, and the current environment presents a buying opportunity.
Sensitivity Analysis (author's own calculations)
Conclusion
HIMS delivered another record-breaking quarter, reaffirming its transition to AEBITDA profitability. Business wise, the company is doing great, which doesn’t seem to correspond with the latest drop in the share price. I think this creates a buying opportunity as my target price implies more than 3.4x upside.
For further details see:
Hims & Hers: The Current Weakness Creates A Buying Opportunity