Triple-digit investment returns have become rare in this bear market, but that's precisely what telehealth company Hims & Hers Health (HIMS 0.08%) has delivered; the stock is up almost 250% from its 52-week low. Wall Street sold the stock into the ground but couldn't deny the company's excellent operating results in recent quarters.
Naturally, one might assume that chasing a stock up so much in such little time is dangerous, and it can be. However, the evidence shows that Hims & Hers might be an exception worth making. Here is why the stock's hot run might not be over yet.
Rapid growth is no fluke
After the pandemic caused abnormal growth spurts for companies throughout Wall Street, 2022 was a year of reckoning. Many companies saw growth dramatically slow against tough year-over-year comparables and tailwinds that faded as the world returned to normal. In that light, it's understandable that some might doubt Hims & Hers.
The business model isn't rocket science; patients can use the company's website or smartphone app to consult with medical professionals for various health conditions and receive a prescription or over-the-counter medications on a subscription that ships to your door. Hims & Hers has numerous competitors, both privately held (Roman) and publicly traded (Teladoc), but the numbers show that Hims & Hers has a secret sauce that resonates with patients:
HIMS Revenue (Quarterly YoY Growth) data by YCharts.
While direct competitors like Teladoc and indirect peers like GoodRx have seen growth stall, Hims & Hers is accelerating. The company markets itself as a consumer brand more than a clinical service, using partnerships with celebrities and selling both through retail and direct-to-consumer. You can never disregard competition, but it's apparently not impacting growth.
A consumer product business with software-like financials
Hims & Hers' financials might be the most overlooked aspect of the company; gross profit margins have rapidly improved as the business expands, going from 29% on $27 million in revenue in 2018 to 78% on $527 million in revenue in 2022. Additionally, most of Hims & Hers' customers enter subscription plans, making about 90% of sales recurring, similar to a SaaS business.
Based on this trend, Hims & Hers has a path to bottom-line profits; the company turned profitable on non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fourth quarter of 2022 ($3.9 million). Management is forecasting $20 million to $30 million of EBITDA in 2023 on $735 million to $755 million in revenue and put out a 2025 target of $100 million in EBITDA on $1.2 billion in revenue.
Hims & Hers doesn't have to be immensely profitable overnight, but these multiyear trends are moving in the right direction, and management was confident enough to put out a 2025 goal. The company still must execute, but Hims & Hers is quickly building a strong history of exceeding its quotas. Remember, its SPAC presentation called for $233 million in sales in 2022 and more than lapped that goal. These things could give investors more confidence in the stock, which could mean a higher valuation.
The valuation is still more than reasonable
Speaking of which, Hims & Hers is (somehow) reasonably valued despite its tremendous run in recent months. The stock trades at a price-to-sales (P/S) ratio of just under 4, just over its average since going public. But how do you tell if this is a good value? Consider a technology company like Cloudflare; it's growing revenue at half the rate Hims & Hers is, makes a similar gross margin, but trades at a P/S ratio of 20.
NET PS Ratio data by YCharts.
The point isn't to directly compare the two stocks; I don't expect the market to trade Hims & Hers at a P/S ratio of 20. But the context can show you how much less you're paying for similar financial results. Even if Hims & Hers trades at a P/S of 4 forever, the company's growth could produce tremendous investment returns over the coming years. Where will Hims & Hers be with 5 million customers? It just hit 1 million at the end of 2022.
The stock could cool a bit in the short term, and some investors might take profits after a lucrative few months. Nonetheless, Hims & Hers seems early in its story as a company, and the stock could have much more to offer in the years ahead.
