Hims & Hers Health: Becoming A Market Leader Within The Growing Digital Health Industry

Investment Thesis

Hims & Hers Health, Inc. (NYSE:HIMS) is a leader within the growing digital health industry with a track record of outgrowing its closest competitors in the last few years. The company has continued its journey towards profitability over the past year, reducing its losses significantly. At the same time, revenues and subscriptions have been growing at more than 45% which has helped in improving the unit economics of the business and positioned HIMS with more than 50% market share in the telehealth market. Looking at the valuation of the business, using a discounted cash flow (DCF) valuation, I see HIMS as a buy at current prices as it offers a roughly 16.5% return annually over the next 5 years.

Company Overview

HIMS is an American telehealth company, primarily providing a number of health and wellness services. The company’s business can essentially be described as an online personalized healthcare services which offers consultations, prescriptions and other health products through its digital platform. In terms of revenue, the company typically generates money through the sale of subscriptions for regular product delivery and purchases of their products. The business operates within quite a new industry of digital health markets, which is growing quickly and competes with businesses such as Teladoc Health (TDOC) and Roman Health.

Strong Subscriber Growth Within an Expanding Industry

The emergence of the online healthcare industry has seen a number of companies arise providing consultation and prescription services including HIMS. In my opinion its thanks to progress in things like high-speed internet and widespread smartphone usage that most Americans can now receive personalized healthcare online, which I believe massively alters the whole healthcare industry and introduces a level of convenience not possible before. I see this convenience as well as ease of access and cost effectiveness as the main reasons why many people are turning towards digital healthcare providers and why, as we can see below, the U.S. digital health market is expected to grow at 19.5% through to 2030.

I believe that HIMS are positioning themselves well within this industry and the fact that it’s growing at such a fast rate is a good sign for the business as it extends the, already long, runway for growth that it has. When we look specifically at HIMS and their growth trajectory, the company seems to be growing faster than the broader industry when focusing on its subscriber growth as it has increased by 48% year on year to 1.5 million subscribers. This subscriber growth isn’t just empty numbers either in my opinion as the company has managed to maintain a strong revenue per average customer, suggesting to me that new customers are joining and immediately spending on the platform at a similar rate to existing customers.

Furthermore, Hims & Hers Health is growing much quicker than other telehealth providers and now has about half the total customers among primary telehealth providers as seen below.

This is a good sign for the business in my opinion as an expanding subscriber base provides the foundation for further revenue growth as each new subscriber offers the potential for reoccurring revenue. Additionally, given the size of the business, it’s clear to me that much of Him & Hers’ addressable market may not be aware of the business and therefore the company could stand to benefit massively from the increased network effect an increasing number of subscribers brings.

Narrowing Losses Is An Encouraging Sign For Their Journey To Profitability

As we saw in Hims & Hers Heath’s most recent earnings report, the company has continued to make progress towards profitability, which is something that has been a major question for investors since the company’s

(SPAC) in 2021 in my opinion. Since 2021, we have seen losses reduce going from a net income of -$108 million to -$24 million today.

Obviously, the goal of profitability has not been achieved yet, but I think the groundwork is in place to make that goal a reality in the coming years. For starters, because HIMS is an online business, a large share of the expenses are fixed costs related to infrastructure, platform maintenance and administration which are needed regardless of the subscriber count or revenue total. As Hims & Hers Heath grows, the fixed costs will become a smaller portion of total expenses and should help in driving down the cost per subscriber, improving unit economics and helping to improve margins. I believe we are already seeing this play out as the gross margin has gone from 74% in Q1 2022 to 83% in Q4 2023.

I believe that as the company continues to grow and draw in more customers, we will see more improvement in Hims & Hers Health’s unit economics, and it will reach profitability in the coming years as a result. And that’s not even mentioning the introduction of (AI) which I believe will help to optimize costs and improve customer experience, which I think will further reducing cost per subscriber and increasing subscriber retention.

Financial Analysis

As of Q4 2023, HIMS has shown excellent growth across much of its income statement. In my opinion, the rise in revenue from $82.56 million in 2018 to $872.00 million over the last twelve months (LTM) is incredible. This corresponds to an amazing (CAGR) of approximately 100%.

Obviously, as I mentioned, profitability has been somewhat of a concern for investors and question mark over the business since its entry onto the stock market. As I discussed, the company has made a lot of progress in its efforts to become profitable, and now, looking at the most recent EPS of $0.11 is less than a fifth of the EPS loss of $0.58 experienced in 2021. Assuming the company reduces loses at a similar rate it has done in the last 3 years, we could see a profitable year as early as 2024.

Although this improvement is an exciting sign for investors, one thing that we must consider when looking at the per share financials for the company is that Hims & Hers Health’s shares outstanding has been slowing rising since 2021, going from 205.07 million to 214.25 million today. Whilst this rate isn’t too concerning in my opinion, it is certainly something to keep an eye on as share dilution can offset shareholder’s gains.

On the debt front, the company currently has no long-term debt and has very little liabilities in comparison to their assets with HIMS having a current ratio of 3.00 and a debt-to-equity ratio of 0.28. In terms of cash on hand, the company has cash and cash equivalents of about $97 million which almost enough to cover all of the $98 million of liabilities the company has.

In the near term, being the coming financial year, my expectation is that HIMS will continue to report strong subscriber and revenue growth in their upcoming quarterly results. I also anticipate that the company will continue to improve its operating margins and I believe there is a chance the company breaks profitability in 2024, although I’m more confident in saying that 2025 is more likely to be the year.

Beyond the next twelve months, I hope to see HIMS continue to dominate the telehealth market and continue to expand its margins, reducing its overall cost per subscriber. I also expect the company to continue to implement technology like AI to improve the customer experience, which is something I like as I think this help HIMS retain customers which I think is key as anticipate that this industry will become increasingly competitive given the lucrative opportunities it presents.

Valuation

In my opinion, growth is only half the issue, a company’s value is dependent on its underlying fundamentals and future earnings potential and how this compares to the stock price. To do so, I’m choosing to use a DCF analysis. Looking at the most recent earnings, HIMS had a free cash flow (FCF) per share of $0.22. When thinking about the strong growth the company has seen in the past few years, thanks to the growing subscription base and the shift towards telehealth, I believe that a growth rate of 25% of Hims & Hers Health’s FCF is possible in the next 5 years, which is less than their previous 5-year growth rate and less than analysts’ expectations over the period. This growth rate gets us to $0.67 FCF per share by the end of year 5.

Using an exit price to FCF multiple of 35, which is lower than the price to FCF of most companies that grow at a similar rate, we get a price target of about $25.20 in 5 years. This future price results in an expected CAGR of about 16.5% over the next 5 years. It’s obviously important to consider that this model assumes that HIMS continues to grow strongly and continues to reach its targets. However, as I discussed above, I believe the company has strong growth prospects and believe the growth rate I applied is very achievable and therefore believe HIMS is a buy at the current price.

Conclusion

Hims & Hers Health strong performance within the growing digital health industry highlighted by their expanding market share, fast-growing subscription base and reducing losses has got me excited by the potential prospects of the company. Additionally, the company’s solid financials, with expanding revenues and low debt levels, accompanied by the possibility of profitability in the near term creates a strong foundation for the business and should allow it to weather potential uncertainty should they arise. A DCF analysis of HIMS indicates that if the company continues to grow at a solid rate of 25% then we should see returns of around 16.5% (CAGR). Based on all those factors I mentioned, I believe that at the current price of $11.88, HIMS stock is a buy.