Healthcare in the United States is a massive multitrillion-dollar industry, but it's fragmented too; there are many areas of care and conditions where different treatments are needed. Direct-to-consumer telehealth company Hims & Hers Health (HIMS 0.04%) has gotten strong traction, treating a variety of ailments to grow its subscriber base to more than 609,000 consumers.
The company's steadily making moves to develop its retail channels and expand into new product categories that could further broaden the brand's appeal and drive strong growth. Here is what investors need to know.
Rapid product expansion creates opportunity
Hims & Hers is a relatively young business, only launching in late 2017. The company started by addressing taboo health conditions that most patients were embarrassed to speak with in-person care providers about, like sexual health and hair loss. But the company's been rapidly expanding on its product offerings, which has continued today.
Image source: Getty Images.
Over the past several quarters, the company has expanded into new categories, including mental health, skincare, and primary care. It launched a mobile app, making it easier for consumers to seek consultations, while launching products like new prescription treatments for women's dermatology, mental wellness supplements, and doubling its available skincare products -- all since the beginning of the year. Management estimates that the primary care, anxiety, depression, and dermatology markets alone are worth more than $300 billion.
Having more products available could unlock more revenue per consumer due to cross-selling while attracting new patients to the platform for specific ailments that may not have had treatment options available in the past. Keeping a brisk pace in product innovation should help support continued strong revenue growth, building on the company's 83% year-over-year growth in 2021.
Retail channels are just beginning to flourish
The past two years have included a flurry of retail partnerships for Hims & Hers, including deals to place products in Target, Walgreens, The Vitamin Shoppe, CVS, Amazon, Bed Bath & Beyond, GNC, and Walmart. Partnering with so many large retailers emphasizes building a wholesale channel.
Many of these deals came recently, so they haven't impacted operating results much. As of now, wholesale revenue is just five percent of the company's total sales, but is likely to rise over time.
Investors could be concerned that wholesale revenue will have lower profit margins than consumers who subscribe and buy directly from Hims & Hers. Still, the company is banking on the exposure of retail as a sales funnel to help grow the brand. Someone may buy a Hims & Hers product for the first time, enjoy it, and subscribe to have it delivered to their door instead of buying it at the store.
Investors will see how wholesale revenue grows compared to subscriber revenue over several quarters. Success would mean making the company more efficient and growing without spending as heavily on sales and marketing. Lower marketing costs could make up for the potential hit to gross profit. Hims & Hers is currently operating at 75% gross profit margins, so the existing financials of the business model are very healthy.
Stock valuation leaves room for upside
Hims & Hers has been on the punishing end of the slide among growth stocks, down to just over $5 per share from its highs of more than $20 in 2020. However, the company's continued revenue growth has steadily pushed the stock's valuation lower, and its price-to-sales ratio has now fallen into the low-single digits.
HIMS Revenue (TTM) data by YCharts.
The stock market is struggling to develop an appropriate value for the business -- a consumer products business on the one hand, but a telehealth company on the other. Is there anything proprietary about what Hims & Hers does that competitors cannot copy? I don't think so, and there are competitors out there.
However, numbers don't lie, and Hims & Hers has shown thus far that its business is thriving. Management is guiding for $380 million in revenue in 2022, a 40% increase and a sharp slowdown from 2021's 83% growth. Management has under-promised and over-delivered since the company went public, but investors will need to see how things play out over the next several quarters.
If Hims & Hers can continue showing it can sustain its strong growth, the market may no longer be able to deny the stock's upside. With just a $1 billion market cap, Hims & Hers has the room to generate great, long-term returns if the business model keeps delivering results.
