Finding an emerging industry leader in its early stages can generate life-changing wealth. What wouldn't investors do to go back in time and buy shares of Tesla or Amazon stock before they became the household names they are today?
Digital healthcare company Hims & Hers Health (HIMS 3.20%) could someday be a household name. It's already a winning stock in 2023, more than tripling in value from its lows over the past year.
But the company's story is still being written, which means long-term investors could reap years of gains by holding the stock in a well-diversified portfolio. Here is what you need to know.
Customers love the product
Most stock success stories include a watershed moment where the company discovers its product-market fit. In other words, customers enjoy and -- more importantly -- desire a product. Hims & Hers is a digital healthcare business that markets itself as a consumer brand. A customer can go to its website or smartphone app and receive a digital consultation with a healthcare professional. They can then purchase over-the-counter and prescribed products to treat various conditions, including hair loss and erectile dysfunction, as well as mental health issues and women's care concerns.
In a nutshell, Hims & Hers took health conditions you might not want to discuss face-to-face with a doctor and wrapped discretion around them to make a tidy consumer brand. Thus far, the recipe is a winner:
Image source: Hims & Hers Health. Note: Subscriber totals are in thousands.
Subscribers skyrocketed from 358,000 to 1.04 million in just two years. Notably, multimonth subscribers (i.e., repeat customers) rapidly increased, too, so it's not like Hims & Hers is growing from a bunch of people using it once and leaving. The company is showing potential brand strength, and repeat business makes revenue more stable.
There's still a ton of room to grow
If users keep flocking to Hims & Hers, there is a serious potential growth runway ahead. Roughly 140 million Gen Zers and millennials live in the United States alone. In other words, the company does business with less than 1% of young adult Americans. Even if market penetration never hits 10%, that could multiply the company's subscriber base and doesn't factor in potential international expansion.
But Hims & Hers can also grow in other ways. Conditions like obesity and diabetes impact millions of people, and Hims & Hers hasn't even launched in those markets -- something management has noted as a future possibility. The company is aggressively pursuing subscriber growth, but cross-selling is a significant opportunity to improve revenue per subscriber.
Hims & Hers just grew subscribers by 88% year over year in the fourth quarter. That rate will slow as the subscriber base expands, but is it a stretch to imagine a decade of subscriber growth averaging 20%? That would put the customer count at roughly 6 million 10 years from now. Only time will tell if Hims & Hers remains so popular, but it doesn't take much imagination to see the long-term growth potential.
The stock is still reasonably valued after its hot run
It would have been better to buy the stock at $3 a share instead of the $11 it's at today, but its valuation is still reasonable if you're a long-term investor. It's tricky valuing companies that aren't profitable yet, but here is an interesting comparison: Consider Hims & Hers versus a technology business like Palantir. You can see below that Hims & Hers is growing faster with the same gross margin and sports a better EBITDA margin.
HIMS Revenue (Quarterly YoY Growth) data by YCharts
However, Palantir's stock trades at a price-to-sales ratio (P/S) of 9, compared to 4 for Hims & Hers. Shouldn't Hims & Hers have a higher valuation given its much higher growth rate? Don't worry; the market is a popularity contest in the short term, but it typically sniffs out the winners if you give it time. There's a lot to like in Hims & Hers Health -- it just needs to keep it going, and so far, there isn't an obvious reason why it won't.
