Remembering that the stock market is often shortsighted can make you a lot of money over time. Taking a long-term approach to investing is a superpower that the hedge funds and pros on Wall Street can't afford to do.
That's why when a stock like Hims & Hers Health (HIMS 1.87%) puts up the type of operating results it does, yet the stock falls nearly 30% as it has since May, I giggle and thank the market for the opportunities it gives.
I'll show you why this company has the makings of a multibagger and why investors should jump at the opportunity to buy shares on such a big dip.
Why might Hims & Hers be falling?
Looking at the evidence, Hims & Hers began falling after it released its first-quarter earnings report. Considering revenue grew 88% year over year, it would seem that Wall Street might be focusing on the company's bottom line. After all, the market has seemingly punished unprofitable companies since last year, and Hims & Hers isn't profitable yet on a GAAP basis.
Additionally, some might worry that Hims & Hers, a telehealth company that lets patients consult with professionals and receive prescriptions over an app, might not have a competitive advantage. The company spent $97 million in Q1 on sales and marketing, roughly half of its revenue. It's an admittedly high ratio and invites speculation that the company is buying its growth. In other words, the business can't grow without excessive marketing spend.
These are valid questions. Remember that a market needs both buyers and sellers to work, so investors must accept the poking and prodding emerging companies receive until their operating results convince the market otherwise. That said, there is evidence that these negative assumptions about Hims & Hers are misplaced.
Looking at the other side of the coin
Remember how I said Wall Street could be shortsighted? Time to look at the other side of the story and explore why Hims & Hers might be spending so much money on marketing. It comes down to unit economics. In other words, is the company getting a good return on all the marketing money it spends?
You can see below that subscribers have grown rapidly from a pure growth standpoint, signaling that its high marketing spend successfully brings users to its platform. The company's subscribers have tripled in less than two years to more than 1.2 million.
Image source: Hims & Hers Health.
Additionally, management states that it recoups enough gross profit to cover its customer acquisition costs in less than one year. You can see that multi-month subscribers have grown to become an increasingly more significant portion of the user base (a good sign), and management cites that it retains 85% of revenue from subscribers who purchase for two years. In other words, once a customer has been buying for a couple of years, they rarely stop buying. That makes long-term customers extremely valuable to the platform.
I believe Hims & Hers could turn profitable if they cut back on growth efforts and pocketed a chunk of their marketing budget. However, it makes sense to delay profits and invest in acquiring as many long-term customers as possible, since they become very lucrative over time.
The long runway ahead
Hims & Hers has grown at a near-triple-digit growth rate for several quarters, which signals strong business execution. A massive market opportunity signals the company could maintain strong growth for a while. Hims & Hers has just over 1.2 million subscribers, a tiny fraction of the U.S. population and that of developed countries.
There are several potential growth buttons to push, including growing in the United States, expanding into new geographies, new health condition categories, product innovation, and over-the-counter sales. That's not to say I believe Hims & Hers is the next titan in the healthcare industry, but at a market cap of just under $2 billion, it doesn't have to be. Eventually, management will begin focusing more on its bottom line, and the company's 80% gross margins could eventually translate to some scorching earnings growth when marketing spending plateaus.
Is it outlandish to think that Hims & Hers could someday have 5 million subscribers? 10 million? This might take a decade or longer, but the stock could eventually be worth far more than it is today. Hims & Hers is a get-rich-slowly investment, but the long-term ceiling is indeed exciting.
