It's no secret that growth stocks are floundering amid recent downward swings in the markets. But the stock market rewards patience: those willing to look past the short term may find nuggets of gold hiding in plain sight.
Telehealth company Hims & Hers Health (HIMS 0.08%) could be one such treasure. But what makes this stock stick out in a crowded sector, and how poised is the company for mammoth growth? Let's dive into the fundamentals to investigate.
A new "spin" on healthcare
Most people in the U.S. address their health in two ways: They use over-the-counter products and they seek prescription products from a medical professional. Hims & Hers Health combines these two concepts to offer a one-stop shop for medicines.
Image source: Getty Images.
On one level, Hims & Hers Health is a telehealth company that offers low-cost online medical consultations. Patients can text, call, or video chat with healthcare professionals to discuss a range of ailments. Following the consultation, doctors may prescribe medications that can be filled at local pharmacies or delivered directly to patients' doorsteps. At the same time, Hims & Hers Health also operates as a consumer-facing brand, selling various products and supplements under the retail names "hims" and "hers." These generic products are available online and at well-known retailers across the U.S.
This model strives to care for consumers' low-level health ailments in a digital-first manner. The company wedged its way into the market by treating taboo conditions like hair loss and erectile dysfunction, but has since expanded into areas such as primary care and mental health.
Strong financials pave a promising growth runway
The business model is intriguing, but what sets Hims & Hers Health apart from the pack? Competition in the digital and direct-to-consumer healthcare markets is steep. In late 2020, giant UnitedHealth launched Optum Store, a direct-to-consumer system that operates similarly to Hims & Hers Health's online pharmacy. Teladoc is a top-dog player in virtual care and telehealth solutions. Private companies, like Ro, follow a business model that's nearly identical to that of Hims & Hers Health. Investors take this competition to mean that Hims & Hers Health has no moat: the stock sits at roughly $4 per share, down dramatically from its initial $10 per share SPAC (special purpose acquisition company) price.
But the numbers behind this company tell a different story. Despite the fact that Hims & Hers Health is not in the business of developing proprietary prescription products, its brand identity resonates with consumers inside a vast addressable market. From the first quarter of 2019 to the fourth quarter of 2021, Hims & Hers Health increased recurring subscriptions from 157,000 to 609,000. Its telehealth business has also grown steadily: Annual consultations increased over 450% within three years
As a result of this growth, revenue increased 117% annually from 2018 through 2021, reaching $272 million in the latest fiscal year. Its non-GAAP EBITDA (earnings before interest, taxes, depreciation, and amortization) was negative $30 million for 2021. But that negative number is no reason to panic: Hims & Hers Health has nearly $250 million in cash and short-term investments on its balance sheet, meaning it has the funds to pay for growth over the coming quarters. Its 75% gross profit margin in 2021 represents a 197% annual increase since 2018; these growing margins suggest that the business should turn profitable over time as revenue continues to grow.
Turning $1,000 into $10,000
Despite strong growth, the market has yet to warm up to Hims & Hers Health. This could be attributed to several factors: that the company went public through a SPAC merger, that investors see telehealth as a "commodity," or that the high-inflation environment is pressuring stocks across the board. Whichever way you slice it, Hims & Hers Health's revenue has reliably increased over the past year while the share price has stumbled.
Judging by the company's 2021 full-year revenue of $271 million and market cap of roughly $900 million, the stock now trades at a price-to-sales ratio of just over 3. Considering that some tech companies with similar numbers trade at a P/S ratio of 15 to 25, Hims & Hers Health looks like a bargain.
Private competitor Ro fetched a $5 billion valuation in 2021 based on its $230 million 2020 revenue. Hims & Hers Health reports slightly higher revenue ($272 million in 2021), but at one-fifth of the market cap. I think it's reasonable to expect a higher valuation of Hims & Hers in the near future, especially if the company can continue posting strong revenue growth.
It won't happen overnight, but Hims & Hers Health could very reasonably grow to reach an $8 billion to $10 billion market cap. The company is clearly planning for major expansion: it just launched a smartphone app and struck various retail deals over the past year that have yet to be reflected in earnings. If you can weather today's market and have a time frame of five years or longer, Hims & Hers Health could hit $1 billion to $2 billion in revenue. Even a modest increase in valuation could produce tremendous returns, turning a $1,000 investment today into something far greater down the road.
