Looking for a top growth stock to buy this year? The usual high-growth tech stocks may not look so great in what's turning out to be a tumultuous year in the markets in 2022. Although healthcare may not be a place growth investors may think to turn to right now, it could offer some promising opportunities.
One healthcare stock that looks like a bit of an underdog is Hims & Hers Health (HIMS 0.68%). The fast-growing business focuses on sensitive areas of healthcare, such as erectile dysfunction and hair loss. Members subscribe to receive products on an ongoing basis. The niche has proven to be successful thus far and could lead to some strong results this year.
Sales are up sharply, and more growth is on the way
Hims & Hers released its latest earnings numbers earlier this month, and they were impressive. Quarterly sales of $101.3 million for the period ended March 31 nearly doubled from the prior-year period. Its net loss of $16.3 million was also less than half the size of the $51.4 million loss that Hims & Hers incurred in the same quarter last year.
The company has been growing rapidly for several years. Full-year revenue soared 83% to $271.9 million in 2021. And for 2022, Hims & Hers projects that its top line will come in between $410 million and $425 million. That implies a growth rate of at least 51%.
In total, Hims & Hers will have more than quadrupled its 2019 revenue this year, growing from $82.6 million three years ago to around $417.5 million (the mid-point of its guidance for 2022).
Why the business could thrive
What makes the company appealing and resilient is that in addition to serving important and sensitive needs for its customers, the bulk of its business comes from online orders. That can help keep operations lean, and it's no surprise that the company's gross margin is in the mid-to-high 70s. That means more than 70 cents of every dollar in revenue will be able to cover its operating expenses. If those margins hold up and the company continues growing, it should only be a matter of time before Hims & Hers turns a profit.
Plus, the company's strong subscriber base can help keep customer acquisition costs down, leading to a strong bottom line. In Q1, Hims & Hers reported its largest gain ever in subscribers, with an increase of 101,000 during the period. At 710,000 subscriptions, that's 82% higher than the number Hims & Hers reported a year ago.
The repeat business should help provide some stability and growth, and make it easier for the company to help expand its sales even further. The increase in subscriptions suggests the company is doing a good job of attracting consumers, and with an even higher growth rate in revenue, it appears to be keeping them happy enough to stay subscribed to the service.
Is the stock a buy?
Down 47% year to date, shares of Hims & Hers have been taking a beating (by comparison, the S&P 500 is down 17%). A big part of the reason for the steep sell-off likely has to do with the company's lack of profitability.
However, a business in its early growth stages is often going to be unprofitable. What's important is that the building blocks are there for long-term growth. With Hims & Hers, sales are strong, margins are high, and the company's quarterly cash burn of less than $20 million is sustainable given that its cash and short-term investments total more than 10 times that amount.
For investors who are willing to remain patient, this could be a top growth stock to own for years.