Hims & Hers Health: We Are Still So. Damn. Early.

This telehealth company is up 28% in the last three sessions since posting surprise profitability in Q4 2023, but the lion's share of upside remains.

• A one-pager style comprehensive article on why Hims & Hers (NYSE: HIMS) is an incredibly compelling investment from today’s price.

• I estimate HIMS’ fair value at $50.21, representing 283% upside from today’s price.

• Additionally, I believe HIMS has 10x potential in 7 years, and possibly even more if management overdelivers on margins.

Share price: $13.12 (as of 3/1/2024)

52-week range: $5.65 to $13.91 (Low to High)

Market cap: $2.91 billion, based on a fully diluted share count of 221.9 million

Enterprise value: $2.70 billion

Pitch:

• Founded just 7 years ago, Hims operates in the DTC healthcare space, offering over-the-counter solutions for chronic, stigmatized conditions such as hair loss, erectile dysfunction, anxiety, depression, and skincare, which are recurring in nature.

• The bulk of Hims’ revenue (over 95% in 2023) comes from monthly or multi-month online subscriptions shipped straight to the customer’s door, often cheaper than the co-pay on high-deductible health plans and bypassing the cumbersome insurance reimbursement process.

• Subscribers also have unlimited access to chat, call, or video call a healthcare physician 24/7 with any questions or concerns.

• The company has grown its revenues from $27 million in 2018 to $872 million in 2023 (78% CAGR) and gross profits from $45 million in 2019 to $715 million in 2023 (74% CAGR), demonstrating tremendous product-market fit.

• In 2023, Hims exited the year at a $986 million revenue run rate, growing revenue 65.5% y/y and gross profits 74.9% y/y. While most “large” DTC companies stall out at $100-200 million in revenue, Hims continues to show resounding ability to grow at scale with 1.54 million subscribers (+48% y/y).

• Hims has a 49% market share of telehealth customers between the 5 largest players in the space: Hims, BetterHelp, Curology, Thirty Madison, and RomanHealth, according to Bloomberg — almost 3x as much share as their next closest competitor. This is up from 14% share in 2020, showing their increasingly commanding presence. Hims also won 54% of new telehealth customers in 2023. Despite operating in a highly competitive landscape, Hims is the 500-lb gorilla in the room where the industry itself is expected to grow in the low-20% range over the next 5 years.

• Additionally, Hims has a beautiful brand that resonates with its millennial and Gen Z customer base. Its sharp, witty marketing and advertising makes people feel good about getting treated, which is deeply underappreciated. These conditions often go untreated and may otherwise lead to intense dissatisfaction and downgrades in quality of life for patients.

• Hims is likely to continue adding new categories over time (i.e. the recent weight loss offering), thus improving the diversification of their business, and eventually push into international markets such as UK, Europe, and Canada. This will expand their addressable market and extend their growth runway. In my eyes, it is also likely that the brand will age well over time and serve younger and older generations alike versus their current cohorts.

• While skeptics will point to the largely commoditized offering to-date, Hims is rapidly addressing this concern, with 30% of its subscribers opting for personalized offerings (new form factors like Hard Mints for ED or chewable Hair Hybrids; compounded solutions like ED+Statin for heart health) that increase customer satisfaction and reduce churn. This is up from 10-15% of sales over the previous 2 years. This increased retention allows Hims to increase its customer acquisition cost (per customer) while maintaining robust payback periods and LTV/CAC, something that Spruce Point’s short report misinterprets. Over time, I expect these unique, personalized solutions enabled by their compounding pharmacies to comprise the vast majority of sales.

• CEO/Founder Andrew Dudum has proven to be a phenomenal leader, balancing consistent execution with forward positioning/vision. CFO Yemi Okupe has done a terrific job, too. It is worth noting since going public, Hims has built a track record of beating and raising its own guidance/FY outlook. Dudum has strong alignment with shareholders, as his 5.7% ownership in the company equates to a >$150 million stake at today’s prices, representing the lion’s share of his wealth.

  • While I would much prefer performance awards to be paid based on levered FCF/share (OCF less capex) or operating cash flow/share instead of adjusted EBITDA, it would be a dire mistake to be dismissive of the investment case on this basis.

• My financial model has Hims generating $3.37 EPS in 2030 with 16.2% net income margins, driven primarily by leverage on marketing spend, with benefits of scale offset by a gradual degradation in gross margins. This is broadly in-line with management’s commentary of 20-30% adjusted EBITDA margins in 2030 and 200-300 bps of leverage on marketing spend per year, as well as low-to-mid teens adjusted EBITDA margins by 2027.

  • Revenue Growth: 30% CAGR, driven by low-20s% sector growth plus market share capture, category growth, new categories, and expanding into more mass-market offerings at lower price points.

  • Gross Margins: 75% long term gross margins (currently 82%), decreasing due to sharing cost advantages with customers and high mix of mass-market offerings.

  • Operating Expenses, as a % of Revenue:

    • Marketing: 32.5% (currently 50% in Q4 2023), driven by increased scale and prior elevated spend to build out brand awareness, plus reduced “maintenance marketing” to replace churned customers.

    • Operations and Support: ~11% (currently 13%), driven by increased scale.

    • Research and Development: 3% (currently 5.4%), driven by increased scale.

    • G&A Overhead: ~8% (currently 13%), driven by increased scale.

  • 2.5% annual increase in share count.

• Based on these assumptions, a 10% discount rate, and a 3% terminal growth rate, my DCF yields a fair value of $50.21 and $35.95 if excluding stock-based compensation, which represents an upside of 283% and 174% just to reach fair value. On 2030 numbers, Hims is currently trading at 2.5x EV/EBIT, 3.1x earnings ex-cash, and 1.8x FCF — any way that is sliced, it points to a possible 10x within the next 7 years on what are not-unrealistic assumptions in a massively-derisked business. Beyond 2030, I believe Hims will continue to grow at elevated rates (15-20%) given a pervasive shift towards convenience, increased societal focus on mental and physical well-being, and sheer volume of untreated symptoms in the US alone — for this reason, my terminal growth assumptions are likely too conservative.

  • It is important to note Hims’ valuation model hinges on the degree to which they can get leverage on their marketing spend. However, even if one assumes just a 100 bps improvement per year, the model yields a value of $35.77 and $21.51, respectively. Management’s execution and track record of margin expansion gives me confidence my assumptions are reasonable. Over the past 2 calendar years, Hims’ adjusted EBITDA margins have risen by 1670 bps or 16.7%.

  • Viewed another way, today’s stock price seems to imply 11% revenue growth out to 2030, along with just a 100 bps improvement in marketing spend, carrying over all other assumptions above. That strikes me as far too pessimistic for this business despite recent outperformance in shares.

• At the end of the day, Hims uses their marketing as a growth lever to land grab new customers and build brand awareness — effectively, only a portion of this spend is being used to backfill churned subscribers. It is up to the investor to do the work and determine what this breakout is for themselves, since there is no way to separate “maintenance marketing” versus “growth marketing” as companies can do with capex. This is the market’s unfounded fear, and should become apparent with time.

  • As an addendum, this is a similar dynamic to what monday.com (NASDAQ:MNDY) experienced in fall 2022, a time when the workflow management SaaS co was growing 76% y/y with 90+% gross margins. monday overinvested in marketing, ran a -20% operating margin, and traded down to 4x ARR on fears of structural unprofitability due to astronomical marketing spend. The stock is up nearly 200% since then as the company received dramatic leverage on its marketing and gradually scaled back. Similarly, Hims has full control over its marketing expense and can determine the pace at which it wants to do this, a different churn dynamic notwithstanding.

Takeaway:

Hims & Hers Health is poised for an exceptional decade ahead, with the people, process, and product to lead it there. While no investment is without risk (size responsibly), Hims has no 1:1 competition and they continue to pull further and further away from their peers.

Here is my financial model which you can view for free — let me know if you have any questions or feedback.

I have made a number of rather bold forward-looking statements in this article and I want to reiterate that there are no guarantees, but Hims is now GAAP profitable and has all the makings of a potential home run. Even a little could go a long, long way.

Disclosure: I am long HIMS and HIMS 2026 $10 calls.

The contents of this newsletter do not constitute a recommendation for trading or investment advice. Any estimates or forward looking statements made are inherently unreliable. Readers should do their own due diligence and consult their registered investment advisor or financial advisor before making any investment decision.