Health of him and her (NYSE: HIM) has been my most important post and the one I have written the most about stocks in the last year.
Hims is a telehealth company that connects patients with licensed physicians for a variety of medical issues, including: sexual health, dermatology, mental health and hair loss. The company facilitates prescription fulfillment by connecting its patients with authorized pharmacies after a diagnosis has been made by the company’s doctors. Hims operates in all 50 states.
Hims’ shares have been routinely punished by the market as its share price has been in a downward spiral since it went public last year. Skeptics of the company say that (1) it is not profitable (nor will it ever be) and (2) it does not have a moat. I do not agree with both.
First, the company could be profitable today if it simply reduced its marketing expenses, which for valuation purposes is a discretionary expense that is not necessary to maintain its current customer base.
Second, investors who focus on a moat and not a value proposition are putting the “cart before the horse.” The value proposition comes first and that creates a moat. Hims has a great value proposition: to provide patients with affordable, high-quality healthcare in the comfort of their home using a simple, engaging, and highly digitized platform. As the company’s value proposition takes hold, its infrastructure will grow, its capabilities will expand, and its moat will widen.
Revenues have consistently outperformed and their customer base grows with each passing quarter. Putting the progress into numbers using my discounted cash flow analysis, we can see that the stock should be trading around $17-$18. This represents a gain of over 200% from current levels.
Q3 2022 Performance
Hims had an excellent third quarter report. Here are some of the fast facts:
- Third quarter revenue was $145 million, up 95% from a year earlier
- 79% gross margin
- 991,000 total subscriptions, +174,000 vs. previous quarter
- Over 90% of revenue from recurring subscriptions
- (4%) adjusted EBITDA margin, +9% vs. prior year
- 8.8 million medical consultations since launch, on track to double consultations in fiscal year 2021
Subscription growth and retention
On the left side of the graph, we can see that the company’s subscription growth since 2019 has been exceptional. The company’s quarterly CAGR on subscriptions has been 14%. If Q4 subscriptions follow the same trend, there will be about 1.3 million subscribers in Q4 2022; this is an increase of 530% in the last four years.
On the right side of the graph, we can see that the company’s revenue has also increased exponentially. In one of my previous articles, I forecast Hims to earn $160 million in the fourth quarter. The company is now targeting $159 million in revenue; this is an increase of 894% in the last four years.
I want to emphasize that the company has not even left its infancy stage. We are in the first inning with no outs in this game. I expect subscription and revenue growth to continue to increase exponentially over the next few years as adoption of the Hims platform becomes more widespread.
My accurate income forecasts
Speaking of earnings, I want to point out how accurate my forecasts have been, even though Wall Street and company guidelines differ materially. Below is a table with the different forecasts made for each match.
- Analysts’ quarterly forecasts are their forward guidance from the previous quarter.
- Hims quarterly forecasts are based on the same methodology.
- My quarterly forecasts were placed at the beginning of the fiscal year, with no need to update due to my accurate forecast.
*The expectations for the fiscal year of the three parties are what each of us expected the company to earn at the beginning of the year. You’ll notice that mine was extremely close, while the others weren’t even close. Wall Street severely underestimated the company, while I believe Hims’ guidance was a punching bag for a variety of reasons (I wrote about this in this article).
As of today, Hims forecasts revenue of $519 million for fiscal 2022 versus its forecast of $365 million at the beginning of the year. I guided for $516 earlier in the year. Looks like I hit the mark almost perfectly.
Proof: Here is the exact excerpt from my article earlier in the year:
Future growth potential
Moving into the fourth quarter and fiscal year 2023, I want to highlight some of the strategies and opportunities the company is implementing to continue to grow rapidly.
The company launched a campaign with the NFL during prime-time games on Sunday, Monday and Thursday nights. The company also added moments around leading shows on Hulu for its side of the business. Lastly, the company signed a new celebrity partnership, which remains a secret for now, but whoever it is is expected to add significant brand exposure.
The company’s iOS apps have rocketed to the forefront of Apple’s App Store. As of today, Hims app is ranked 33rd in the medical category with a rating of 4.8 stars (5.7K total ratings). Hers app is also ranked 134th in the medical category with a rating of 4.8 stars (603 ratings). Also, in the third quarter, the company launched both apps on the Android platform (this will help generate even more sales now).
Hims continues to increase the content of the app, adapting it specifically for the user, perfecting its design and making one-click purchases even easier by optimizing the feed/algorithm. Lastly, Hims is making some investments to improve its app experience with new features like “smart routing,” which helps connect the customer to the right operator instantly. All these improvements make it easier for the consumer to buy products, which translates into more sales for the company.
Subscription and Retention Fees
In general, interaction with the app continues to increase and the rigidity of Hims’ subscription-based model is only getting more tasteless. Last year, multi-month subscriptions hovered around 35%; however, the company has seen sequential gains since then, meaning more customers are opting for longer-term subscriptions. This fact has coincided with the increase in the offer of products and the value proposition of the brand. Hims strives to maintain long-term retention rates above 85% and this currently appears to be the case. The churn rate was not disclosed, but last year it was in the mid-singles. Multi-month subscription growth has been the primary driver of strong retention and low churn.
The company plans to increase its number of patented products. The company’s new 25,000-square-foot Arizona pharmacy will help keep up with increased demand and provide the ability to expand business. AOV increased and online revenue generated per subscription in the third quarter was $141, up 7% from the previous quarter.
An analyst asked Hims about possible acquisitions given the exponential scale the company has grown this year. Many small businesses have great ideas and technology, but find it too difficult to scale their business during a recession. These companies could seek the help of a larger player, such as Hims. In fact, CEO Andrew Dudum confirmed that he is seeing more consolidation ideas on his desk. However, he feels that the opportunity for internal growth is so solid that he would rather focus on himself at this time. In other words, the bar is set very high for any possible consolidation activity. I am happy with his response and agree with his game plan.
I predict sales growth by 2022 to be $516 million. From there, I gradually lowered the sales growth over time.
Cost of goods sold and gross margins are two sides of the same coin. Hims gross margin for 2021 was 75%. By 2022, I predict a gross margin rate of 73%. From there, I gradually lowered it over the next few years. Hims has expanded into numerous retail channels (Amazon, CVS, Walmart, etc.) and sales from those channels have lower margins. Therefore, it is advisable to take this into account in the forecast.
The company’s SGA spend as a percentage of sales was 117% in 2021. I assumed it would stay the same in 2022 and then gradually improve as overall sales would outspend at this level.
Taxes, Net AC, CAPX
I kept the tax rate the same, turned net current assets from negative to positive over time, and rapidly increased the company’s CAPX to account for its increased need for infrastructure as the company grows.
WACC, terminal growth rate
The WACC was calculated at 11.22% using the CAPM model. The terminal growth rate is set at 2% to be conservative.
I stand by my earlier assessment and believe the stock price is worth around $17-$18, which is a gain of over 200% from current levels. Hims expects positive EBITDA in the range of $0-$2 million next quarter. I think the bottom line of the company will follow soon and be positive free cash flow by 2024 or 2025.
- The company’s ability to scale and profitability could be affected if larger players enter the market.
- Interest rates rise substantially, making it difficult for the company to make the necessary capital investments.
- The government decides to regulate the telehealth space, dramatically increasing compliance costs.
- To know the set of risks of the company, click on here.
An investment in Hims allows investors the opportunity to enter the ground floor of what could be an industry-changing company. Hims has continued to exceed expectations every quarter and deliver record subscriptions and revenue, and they continue to grow brand awareness. Management has delivered on its promises and I expect the following quarters to build sequentially on the strength of the previous one.
As stated above, I think we are only in the first inning of the company’s future. As Hims becomes profitable, investors can expect the business to expand even faster and the share price to rise substantially. Based on current levels, the stock could offer a 2-3x return. Investors who understand the risks should look deeper into this company as a potential investment.