U.S. healthcare is a massive industry, with spending reaching $3.8 trillion in 2019. It's also notorious for being a complicated sector, which leaves the door open for new businesses to bring solutions to the market. Specialty telehealth platform Hims & Hers Health (HIMS 6.63%) went public earlier this year via SPAC but has seen its share price languish. Here is why investors should take a closer look before rushing to judgment.

A niche company in a massive market

Hims & Hers Health is a digital, consumer-facing healthcare platform. It deals with areas including sexual health, hair loss/care, dermatology, and mental health, all of which are issues that people often feel intimidated to discuss in person -- which can cause many patients to go untreated. Hims & Hers gives a digital outlet for patients to seek care, meet with healthcare professionals through virtual appointments, and then pay to receive prescriptions and treatment products as part of a subscription.

Pregnant woman on a telehealth appointment.

Image source: Getty Images.

The company estimates that its immediate addressable market totals $65 billion, a large sandbox in which to expand its guided 2021 revenue of $251 million to $255 million. As a telehealth company that offers access to primary care, the business has future flexibility to expand into treating other niches of healthcare and can grow its addressable market as a result.

Business is performing at a high level

Hims & Hers is a young company, launched in late 2017, and in just over three years has already accumulated 453,000 subscribers. In its second quarter of 2021, subscribers were up 16% from the previous quarter and 75% from 2020.

Customers are happy with the service, awarding a net promoter score, which scores how likely a consumer is to recommend a brand to another, of 65. The score ranges from -100 to 100, so 65 is a really high score, and exceeds the 9 that Hims & Hers claims traditional healthcare providers receive. This pace of subscriber growth, along with its net provider score,  are indications that the digital business model is resonating with consumers.

A strong brand is important because when patients stay with Hims & Hers for their healthcare needs, the upsell will be natural as the company rolls out new treatments and services, resulting in a lower cost to acquire customers.

Hims & Hers is poised to continue growing; in recently reported Q2 results, revenue was up 69% year over year and profit margins improved to 78% from 71% in 2020. The company is heavily investing in growing the business, so while Hims & Hers isn't yet profitable, the high margins indicate that the company could someday generate strong profits.

Until then, the company is armed with total cash, equivalents, and short-term investments of $317 million, against almost no debt. Losses from operating the business were just $17 million in Q2, so the cash on hand is plenty to keep the business running, and investors shouldn't have to worry about any additional dilution in the short term.

The stock is a bargain

When a company agrees to merge with a SPAC to go public, the SPAC shares are typically valued at $10 per share, and the total number of shares reflect the market cap at which the merged company is going public. This per-share price is called its NAV, or net asset value.

Hims & Hers has seen its stock price fall below $10, meaning investors are pricing the stock below the valuation at which the company originally agreed to go public. But is this deserved? The underlying company seems to be performing, so we will look at valuation.

Using the company's full 2021 revenue guidance, the stock is currently at a price-to-sales ratio of just 6 and a market cap of $1.5 billion. For a comparison, telehealth leader Teladoc trades at a P/S ratio of more than 11. 

Here's the bottom line

Hims & Hers needs to continue proving itself to the market, but its Q2 earnings show that it is doing very well. The company is growing rapidly, but the market is pricing the stock like the story at Hims & Hers is already over, when in reality it's just getting started.

Sometimes stocks are cheap for a reason, and sometimes the market gets it wrong. Hims & Hers will remain a more speculative stock until it has proven itself to the market for a longer period. But if management continues to execute, the stock could be very rewarding at its current price.