Hims & Hers Health: Becoming a market leader in the growing digital healthcare industry

Investment thesis

Hims & Hers Health, Inc. (NYSE: HIM) is a leader within the growing digital healthcare sector with a track record of outgrowing its closest competitors in recent years. The business has continued completed its journey to profitability over the past year, significantly reducing losses. At the same time, revenues and subscriptions have grown by more than 45%, which has helped improve the company’s unit economics and positioned HIMS with a more than 50% share of the telehealth market. Looking at the company’s valuation, using a DCF (Discounted Cash Flow) valuation, I see HIMS as a buy at current prices as it delivers a return of around 16.5% annually over the next five years.

Corporate overview

HIMS is an American telehealth company that primarily provides a number of health and wellness services welfare services. The company’s business can essentially be described as an online personalized healthcare service that offers consultations, prescriptions and other healthcare products through its digital platform. In terms of revenue, the company typically generates money through the sale of subscriptions for regular product delivery and purchase of their products. The company operates in a fairly new sector of digital healthcare markets, growing rapidly and competing with companies like Teladoc Health (TDOC) and Roman health.

Strong subscriber growth within a growing industry

The rise of the online healthcare industry has given rise to a number of companies offering consulting and prescription services, including HIMS. In my opinion, it is thanks to advances in things like high-speed internet and widespread smartphone use that most Americans can now receive personalized healthcare online, which in my opinion is vastly changing the entire healthcare industry and introducing a level of convenience that was not possible before . I consider this convenience, ease of access and cost-effectiveness to be the main reasons why many people are turning to digital healthcare providers and why, as we can see below, the US digital healthcare market is expected to grow by 19.5% through 2030. .

I believe HIMS is positioning itself well within this sector and the fact that it is growing so quickly is a good sign for the company as it extends the already long runway for growth that it has. Looking specifically at HIMS and their growth trajectory, the company appears to be growing faster than the broader industry if we focus on subscriber growth, as it is up 48% year on year to 1.5 million subscribers. This subscriber growth isn’t just empty numbers in my opinion either, as the company has managed to maintain strong revenue per average customer, which to me indicates that new customers are joining and immediately spending on the platform in a similar pace to existing customers.

Additionally, Hims & Hers Health is growing much faster than other telehealth providers and now has approximately half the total number of customers among primary telehealth providers, as seen below.

In my opinion, this is a good sign for the company as a growing subscriber base sets the stage for further revenue growth as each new subscriber brings the potential for recurring revenue. Furthermore, given the size of the company, it is clear to me that a large portion of Him & Hers’ addressable market may not be aware of the company and therefore the company could benefit greatly from the increased network effect that an increasing number subscribers.

Reducing 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 toward profitability, something that has been a key question for investors since the company’s inception.

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

Clearly the goal of profitability has not yet been achieved, but I believe the foundation is in place to achieve that goal in the coming years. For starters, because HIMS is an online company, a large portion of expenses are fixed costs related to infrastructure, platform maintenance and administration, which are required regardless of the number of subscribers or total revenue. As Hims & Hers Heath grows, fixed costs will become a smaller portion of total spend and should help reduce costs per subscriber, improve unit economics and help improve margins. I think we’re already seeing this happening as gross margin has increased from 74% in Q1 2022 to 83% in Q4 2023.

I believe that as the company continues to grow and attract more customers, we will see more improvement in Hims & Hers Health’s economic performance, and as a result, the company will become profitable in the coming years. Not to mention the introduction of (AI), which I believe will help optimize costs and improve customer experience, which I believe will further reduce costs per subscriber and increase subscriber retention.

Financial analysis

As of the fourth quarter of 2023, HIMS has shown excellent growth across a large part of its income statement. In my opinion, the increase in revenue from $82.56 million in 2018 to $872.00 million in the last twelve months (LTM) is incredible. This equates to an astonishing (CAGR) of approximately 100%.

Obviously, as I said, profitability has been somewhat of a concern for investors and has been a question mark over the company since its introduction to the stock market. As I’ve discussed, the company has made a lot of progress in its efforts to become profitable, and now looking at the most recent earnings per share of $0.11, this is less than a fifth of the EPS loss from $0.58 in 2021. Assuming the company cuts losses At a similar pace to the past three years, we could see a profitable year as early as 2024.

While this improvement is an exciting sign for investors, one thing to keep in mind when looking at the company’s per-share financials is that Hims & Hers Health’s outstanding shares are rising more slowly since 2021, from 205.07 million to 214.25 million today. While this percentage isn’t too concerning in my opinion, it is certainly something to keep an eye on as stock dilution can offset shareholder gains.

In terms of debt, the company currently has no long-term debt and has very few liabilities compared 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, the company has cash and cash equivalents of approximately $97 million, which is almost enough to cover all of the company’s $98 million in liabilities.

In the short term, i.e. the coming financial year, I expect HIMS to continue to report strong subscriber and revenue growth in the coming quarterly results. I also expect the company to continue to improve its operating margins and I think there is a chance the company will break through to profitability in 2024, although I feel more confident in saying 2025 will likely be the year.

I hope that HIMS will continue to dominate the telehealth market over the next twelve months and expand its margins, driving down overall costs per subscriber. I also expect that the company will continue to implement technology such as AI to improve the customer experience, which I like, because I think this helps HIMS retain customers, which I think is critical, because I expect this sector to continue to will become more competitive given the lucrative opportunities it offers. presents.

Valuation

In my opinion, growth is only half the problem; the value of a company depends on its underlying fundamentals and future earnings potential, and how this compares to its share price. To do this, I choose to use a DCF analysis. Looking at the most recent earnings figures, HIMS had a free cash flow (FCF) per share of $0.22. When I think about the strong growth the company has experienced in recent years, thanks to its growing subscription base and shift to telehealth, I believe a 25% growth rate in Hims & Hers Health’s FCF is possible over the next five years, which is less than their previous five-year growth rate and less than analyst expectations for the period. This growth rate puts us at $0.67 FCF per share by the end of year 5.

If we use an exit price to FCF of 35, which is lower than the price to FCF of most companies growing at a similar pace, we get a five-year price target of about $25.20. This future price results in an expected CAGR of approximately 16.5% over the next 5 years. It is of course important to remember that this model assumes that HIMS will continue to grow strongly and achieve its objectives. However, as I discussed above, I believe the company has strong growth prospects and I believe the growth rate I applied is very achievable and therefore I believe HIMS is a buy at its current price.

Conclusion

Hims & Hers Health’s strong performance within the growing digital health sector, highlighted by their growing market share, rapidly growing subscription base and reducing losses, has me excited about the company’s potential prospects. Furthermore, the company’s solid financial position, with growing revenues and low debt levels, combined with the possibility of near-term profitability, create a strong foundation for the company and should enable it to weather potential uncertainty should it arise. occur. A DCF analysis from HIMS indicates that if the company continues to grow at a solid pace of 25%, we should see a return of around 16.5% (CAGR). Based on all of these factors I mentioned, I believe that HIMS stock is a bargain at its current price of $11.88.