The stock market is a popularity contest in the short term, and if you look at most healthcare stocks in 2021, you might notice that telehealth hasn't been very well-liked. In addition, telehealth company Hims & Hers Health (HIMS -2.42%) came public through a special-purpose acquisition company (SPAC) merger, another unpopular investing theme this year, and we have a stock trading near lows.
But where others see a falling stock, I see an opportunity. Am I crazy? Let's jump into the fray and explore why Hims & Hers Health might be about to take off.
Focusing on the consumer experience
Hims & Hers started in late 2017; it provides telehealth consultations for as little as $39 (you don't need insurance) and then sells prescriptions that are mailed to your door. It covers health conditions such as hair loss, dermatology, sexual health, mental health, and women's health.
So it's natural to ask: "Well, isn't that what a traditional doctor does?" Yes, but consider this: A study by the Cleveland Clinic, one of the country's largest hospitals, found that men do not have good relationships with healthcare providers. It found that 72% would rather do household chores than visiting a physician, and 20% are not honest with their doctor. The primary reason for dishonesty? Nearly half were embarrassed.
For men, health conditions such as hair loss or erectile dysfunction can be very intimidating to discuss face to face with someone. Meanwhile, women face barriers of their own, including unique health issues, and are statistically more likely to face financial obstacles to receiving care. Hims & Hers is providing a more consumer-friendly "front-door" to the healthcare system.
The company's branding and user interface make it look more like you're shopping for cool products than getting medicine from a doctor. It's attempting to turn healthcare from something you seek out when you have a problem into a brand that patients enjoy interacting with. Hims & Hers earns a net promoter score of 65 out of 100, indicating that patients are likely to refer the brand to family and friends.
The company's performance is humming along
Through three quarters of being a public company, the business seems to be executing strongly. Hims & Hers has beaten analyst revenue estimates for all three quarters and has increased its full 2021 revenue guidance from $195 million to $205 million at the end of 2020 to $251 million to $255 million as of 2021's second quarter, a 24% increase in guidance, all within a year.
Hims & Hers isn't yet profitable, but its financials seem strong. The company is running at 78% gross margins; it posted an operating loss of just $17 million in 2021 Q2 compared to its cash and short-term investments totaling $317 million. In other words, investors shouldn't have to worry about dilution from needing to raise tons of capital.
More than a pandemic stock
Healthcare is one of the largest industries in the world, worth trillions in the United States alone. Starting in late 2017, the company has built its customer base to 453,000 subscribing customers from zero in just a handful of years. Its 453,000 subscriber count as of 2021 Q2 is a 75% increase year over year.
The market appears to be skeptical of telehealth stocks as more people get vaccinated, but Hims & Hers is proving its ability to retain customers. CEO Andrew Dudum noted in the company's 2021 Q2 conference call that it has 88% retention of its oldest subscriber cohort. In other words, the vast majority of its customers it acquired two years prior to the pandemic (the company launched in late 2017) are still paying customers today.
Its ability to retain customers, combined with the traffic boost that COVID has been for telehealth companies, could imply not a temporary bump for Hims & Hers, but a permanent one. Investors will, of course, need to track the next several quarters to follow how it retains its users, but management's continually increasing guidance could be a sign of confidence in how things are going.
Hims & Hers has signaled its intention to expand outside of the United States. This summer it acquired Apostrophe, a British dermatology healthcare company, for undisclosed terms. Through Apostrophe, it now offers skincare services in England, Scotland, Northern Ireland, and Wales; opening the door for Hims & Hers in Europe.
By combining new care categories with new geographic markets, the business has fertile ground for strong growth moving forward; it's up to management to continue executing like they have to date.
The stock is dirt cheap
There is evidence that Hims & Hers is one of the cheapest stocks on the market today. It trades at a small market cap of just $1.4 billion. Using management's revenue guidance of $255 million, that works out to a price-to-sales ratio of 5.9.
For a business growing revenue at 71% (compared to 2020 if it hits management's guidance) and generating 78% gross margins, one might think this is a tech stock deserving a lofty valuation. Nope, it's just a healthcare business selling services and products, and doing a great job of it.
Investors should remember that this is a young company, and healthcare is a competitive field, so it's vital that the business continues to perform and build that track record of success. Hims & Hers is a "buy and monitor" stock; don't set it and forget it.
In closing, I find it hard to justify the dramatic decline in shares, because the underlying business is doing better than ever. Earnings season is coming, and we will see if Hims & Hers can knock it out of the park once again.