It Is Time To Buy Hims & Hers (HIMS) Stock

Let's take an informal (and fake) poll. Who loves how the medical system works? Anyone? No one?!

Of course, this is well-known. Net promotor scores for health care services in general are abysmal, below 10. It's no secret why. The average days to get a doctor's appointment is approaching a month (24 days). Most doctor's offices have limited availability, with closures on weekends and outside of normal working hours. Office staff are frequently difficult to deal with, and even when you do get an appointment there are often long waiting room times before seeing the doc. Add in the Byzantine and outrageously expensive corporate-driven health insurance system in the U.S., and its no wonder people hate dealing with it.

Now add another layer on top of this. As we age, we frequently run into completely typical but also somewhat embarrassing health conditions. Adding all of the challenges of seeking healthcare to the natural hesitancy to discuss sensitive health issues and its no wonder that - particularly men - are reluctant to seek out available treatments.

Today's Green Screen stock is a firm looking to address these issues, and make healthcare CONSUMER friendly and focused.

The company is Hims & Hers Health (HIMS). You've probably heard about or seen ads for some of their products. Let's take a closer look!

The Business

Hims & Hers (I'll just call it Hims) is a pharmaceutical marketing, product, and distribution firm with a telehealth component. I know, this confused me a little at first too, so let's walk through a simple scenario: a man seeking treatment for erectile dysfunction (ED).

The process is simple. He would go to the website (hims.com), and click a few links indicating he was seeking treatment for ED. The site takes him through some simple questions, which is then sent to a licensed medical provider. Some states require a telehealth consultation, which the Hims platform will coordinate. Others allow a provider to immediately prescribe a treatment through the platform.

Either way, the process ends with the man ordering treatment through Hims. It could be a white-label external product co-marketed through Hims, like Viagra or Cialis, or it could be a company-developed product like the cheekily named "Hard Mints".

Importantly, it is at this point where the patient can create an account with Hims and set up a recurring subscription to receive treatment at regular intervals (monthly, bi-monthly, annually, etc.). Also, payment is made strictly consumer-to-business - there is no insurance paperwork to wade through, and pricing is transparent and affordable.

That's the business model in a nutshell - pretty straightforward. Take that simple recipe and scale it across numerous product categories: ED, hair loss, premature ejaculation, birth control, STDs, depression, weight loss, skin care (anti-aging, etc.). The vast majority of the firm's revenue comes from subscription sales, and the corporate strategy is to pursue "sensitive topic" clinical areas treated by ongoing, open-ended prescriptions.

There is also a small component (5% of sales) where Hims & Hers sells their non-prescription products wholesale to distributors such as Target, CVS, and Amazon. I see this as more of a marketing strategy to get the brand name out there than a core business one.

The Revenue Model

There are a lot of things to like here. By specifically focusing on open-ended prescription treatments, Hims is able to garner over 90% of its revenue from recurring subscription sales. That makes it a recurring revenue model, one of our prerequisites for investment.

Prospective investors should note that there will be some churn. Management targets 85% long-term retention of subscribers, which is pretty typical for a consumer business. That said, these are short-term consumable products that require repeat purchases at regular intervals. Recurrence of revenue is strong.

Now, onto growth. I'm really intrigued by the addressable markets we are looking at here. Just looking at the firm's current specialties: hair loss, sexual health, anxiety/depression, and dermatology, those together are a $70 billion consumer market. The company recently entered weight loss treatments, which analysts estimate anywhere between a $50-$100 billion opportunity. Then there are numerous expansions - prostate health, cardiovascular, testosterone, menopause, eczema, digestion - that could add even more onto the pile.

Look at it this way. Right now Hims is a $1.8 billion market cap company with a $870 million revenue run rate growing into a market opportunity that could exceed $150 billion. Yeah, there's PLENTY of growth potential here!

And the firm is capitalizing on it too. Revenue grew 83% in 2021, 94% in 2022. Growth will be about 65% this year (2023). Subscribers have nearly doubled the past two years and will be 60% higher in 2023.

I wouldn't be surprised to see Hims grow revenue at a 30% average annual clip over the next 5 years. If they execute well, it could be even better than that. This is clearly one of the faster-growing Green Screens stocks we've looked at recently.

Do We Have A Moat Here?

When we look at this industry, we see miles and miles (and miles!) of competition. Just a quick Google search for "ed treatments" (yeah, I'm gonna be bombarded with ads now...) turns up multiple companies rolling out a similar model, including Roman, Rugiet, Maximus, and others. The story is similar with hair loss and dermatology.

Hims aspires to be a consumer-focused company, and in that space, moat boils down to one thing and one thing only: CONSUMER BRANDING. I wouldn't say the company has this locked down yet, but I think they are doing a good job of getting there. Hims ED Mints ads are everywhere, and I fully endorse the 50% of revenues the company is spending on marketing every year. That Google search I mentioned? Hims was the top sponsored ad.

Once consumers try the brand, it becomes much easier to grow amongst that base, selling existing customers new products. The company has a 69 net promotor score, giving it good word-of-mouth marketing (anything over 60 is considered excellent). So, while Hims doesn't clearly stand out amongst the gauntlet of competition, yet, it has the right strategy to get there.

In any case, when we're talking about $150 billion or more in market potential, moat becomes a bit less important. There is plenty of room for multiple winners.

Management and Financials

Andrew Dudum is CEO. He co-founded the firm back in 2017 and has been at the helm for its rapid rise and public offering via SPAC in January 2021. Through his total ownership of "Class V" common stock, which holds an absurd 175 votes per share, he controls 89% of the voting power. Notably, Dudum also owns about 9.5% of the publicly traded shares, and insiders in total own 29% of the firm. I like to see that as it aligns leadership's priorities with our own - long term, profitable growth.

Financially, the business model looks good and is getting better. Gross margins have expanded from 73.6% in 2020 to over 81% today. The firm is still slightly unprofitable on an EBITDA basis, but has turned solidly cash flow positive in 2023. The balance sheet is debt-free. Management has forecast long-term operating margins in the 20-30% range, which would be in line with several other healthcare oriented consumer products firms.

Not much to complain about here, Hims has founder-led management, strong insider ownership, and a solid and improving financial model.

Risks

OK, let's talk about the risks here. I would rate the firm as a "medium-high" risk pick against our portfolio at large.

Competition is of course a headline risk. We mentioned in the moat section about the huge number of competitors in this space. Barriers to entry are not particularly large. When there are this many players, it is difficult to maintain pricing power and as a result, difficult to maintain a high margin profile, long-term. My price target takes this into account, but if Hims cannot turn a solid profit in a sea of competition, the price target may prove to be too high.

Regulation is the other big risk. The government is very strict - rightly so - about how companies prescribe, market, and distribute prescription pharmaceuticals. Hims' telehealth side is called Affiliated Medical Groups, which consists of a network of independently contracted, licensed physicians. It is not terribly different than the "gig work" done by Uber or DoorDash drivers. While there is no ownership stake (to avoid laws on corporate practice of medicine), Hims basically created and spun off Affiliated to facilitate their business of selling prescription drugs.

While the company has been very careful to structure this side of the business to comply with laws, this is one angle that may be attacked by the competition, or by a politician looking to make a name for him or herself. Should Hims lose the ability to route consultations through what amounts to their own telehealth network, selling those prescriptions could become much more difficult. I see it as a serious - although unlikely - event risk to consider before investing.

Finally, there has been poor market sentiment around this stock. Despite solid business results, HIMS is down about 20% from its public offering price of $10. It has not been a good performer to this point, and the market continues to be wary of SPAC-launched stocks.

Conclusion

I think Hims & Hers has good investment potential. This is somewhat of a different approach to health and wellness product marketing, focusing on prescription-based, online sales instead of wholesaling or retail. This allows the company to show a lot of the business characteristics we like - recurring revenue and brand building - in a large but very competitive market space. As an early mover into this idea, Hims & Hers has a chance to be one of the brands that stand out as more companies copy the strategy.

We walked through the risks, and they are many. Given that, we need to discount our fair value model substantially. I've used a 13% discount, a big jump over the normal 10.5% and far above the current 4.5% 10 year Treasury yield. My modeling calls for 30% annual growth for the next 5 years (driven largely by 2023), 3% annual share dilution, and a 15% long-term free cash flow margin. All of those should be realistic without being overly optimistic (or pessimistic).

That DFCF model gives us a fair value of $16/share. HIMS stock currently trades around $8. So... yeah... that's 50% below the target, representing 100% upside and making HIMS an instant addition to the Buy List! This one could be a wild ride, but it represents good value and a good opportunity for a 2, 3, or 4 bagger over time.