His & Hers Stock: Ready for Takeoff (NYSE: HIMS)

With much of this year’s rally driven by technology stocks, and particularly AI, we often need to look to other sectors for growth.

Another key trend that has dominated the healthcare sector this year it’s the explosion in popularity of Ozempic and related weight loss drugs: and while that’s just one clever part of Hims & Hers (NYSE: HIM) product portfolio, the company has been a big beneficiary of this trend, with inventory growing more than 2x per year to date.

Despite the massive rally since the start of the year, I’m starting Hims & Hers with a Buy rating. Generally speaking, several factors attract me to this company:

• Huge growth rates. Hims & Hers is seeing revenue growth of more than 40% year-over-year, although it expects to reach more than $1 billion in revenue. in 2024.
• Huge gross margins. The company’s focus on generics means it sells drugs that are high margin and inexpensive to make (plus, the company doesn’t incur much R&D spending itself).
• Personalization and customer centricity offerings help create a recurring revenue base. The company prioritizes personalized solutions, in which customers can receive personalized medications to cover multiple conditions at once. This creates a moat for Hims & Hers and potential for recurring revenue.

In my opinion, there is considerable upside potential here as Hims & Hers continues to expand into new treatment areas. Participate in the upward rally here.

Ever-expanding market opportunity

Hims began in 2017 as a seller of the generic erectile dysfunction (ED) drug sildenafil (better known by the field’s most common brand name, Viagra). The company quickly expanded into other areas of men’s health, including hair loss, and in 2018 the company also launched a sister brand, Hers, to cover areas of women’s health.

Since then, the company has grown into a holistic healthcare company, covering a wide variety of treatment areas (see table below):

Although the company sells over-the-counter and prescription medications, it is important to note that it focuses almost entirely on generics. (For investors new to the field: Pharmaceutical patents typically last 20 years of exclusivity, after which generics flood the market. Original drugs, however, become powerful brands that generally remain bestsellers in their categories). So, even if the company does not take any R&D risks, there is little chance of a bullish breakout either.

The company continues to launch new product offerings. Most notably, in December 2023, building on the momentum of Ozempic, the company launched its own weight loss management product starting at $79/month.

Personalized treatments are a key differentiator for Hims & Hers. The company’s core thesis is to make it easier for ordinary men and women to get a quick, understandable diagnosis of their problems and then receive personalized treatment to resolve those problems.

35% of company subscribers opt for a personalized solution. 100% of people following a slimming diet use personalized products. And also note that in the last quarter, the number of users on a personalized plan increased 176% y/ythus creating the Hims & Hers recurring revenue gap:

Huge growth, supported by consistent margin leverage

Meanwhile, recent product expansion and the growing presence of the Hims & Hers brand have helped drive tremendous growth as well as leverage.

In the first quarter, total revenue increased 46% year-over-year to $278 million, well above Wall Street’s expectations of $269 million (+41% year-over-year). Meanwhile, the company had 1.7 million subscribers at the end of the quarter, up 41% year-over-year.

In addition to the 172,000 net new subscribers the company signed up in the first quarter (the result of a recent marketing effort, particularly to promote the personalization platform), the company believes that personalized treatments will also improve retention – particularly for simple convenience of taking fewer pills to treat all illnesses. According to CFO Yemi Okupe’s remarks during the first quarter earnings call:

With this continued transition, we believe several benefits will emerge in the future. The first is better retention. We are receiving signals across several specialties that retention of personalized products is higher, alongside stronger user preference for these products over generic alternatives. This does not surprise us. because feedback on user interactions and behavior is one of the key ingredients in the development of our offerings.

We expect that the continued placement of personalized treatment options at increasingly higher prices in the mass market will increase this advantage. Second, we see opportunities to improve efficiency. Benefits from economies of scale through our customized offerings are expected, similar to what we have observed in other areas of our operations in the past. We believe these benefits will deepen as we continue to expand our portfolio of personalized offerings throughout 2024.”

This source of recurring revenue also generates incredible gross margins that rival those of software companies. Gross margins in the first quarter reached 82%, representing an improvement of 2 points year-on-year:

Meanwhile, operating leverage also helped Hims & Hers achieve a record adjusted EBITDA of 11.6% during the quarter, with nominal adjusted EBITDA of $32.3 million, growing 57% sequentially. and more than 5 times over a year:

Valuation, risks and points to remember

For the current year, Hims & Hers achieved revenue of $1.20 to $1.23 billion (+38 to 41% year-over-year growth) and an adjusted EBITDA margin of 10 to 11% on this turnover profile. In the long term, the company targets a stable adjusted EBITDA margin of 20-30% (which is easy to imagine when gross margins are already over 80%). The company currently spends about half of its figure of business to marketing, which is expected to decline over time as the company’s recurring revenue base grows).

Meanwhile, at the current stock price just above $20, Hims & Hers has a market cap of $4.47 billion. After offsetting the $203.7 million in cash on the company’s most recent balance sheet, it results the company’s value is $4.27 billion. Halfway through this year’s guidance ranges, Hims & Hers’ valuation stands at:

• 3.5x EV/FY24 revenue
• 33.3x adjusted EBITDA EV/FY24

For a company that continues to grow its revenue by more than 40% and achieves approximately 10 points of expansion in its adjusted EBITDA margin year-over-year (with a goal of achieving up to 20 points of expansion additional, up to 30% adjusted EBITDA margin), I would say these are still reasonable multiples.

There are of course risks in this story. As mentioned before: the company’s intellectual property is limited. It is more of a technology and business platform to get medicines into the hands of consumers, rather than a drug brand in its own right. Its main asset lies in its ability to personalize medicines and increase consumer comfort, but nothing prevents another manufacturer or distributor of generic medicines from taking over Hims & Hers’ customer base (especially when it generates margins gross prices as high for marketed drugs).

Still, I would say there are more benefits than risks here. Many of the conditions Hims & Hers treats are covered by insurance when deemed medically necessary, so price sensitivity and customer willingness to switch providers is lower than for purely self-pay products. . The company’s ability to achieve growth of over 40% at scale is a testament to the generosity and novel nature of Hims & Hers’ addressable market.

This is a rocket stockpile you’ll want to keep.