Despite how much attention the market gets daily, nobody knows what a stock's price will do in the short term. Sometimes, something could happen, and the stock's share price will do the opposite of what you would have thought made sense.
There seems to be a bit of that happening with consumer-centric telehealth company Hims & Hers Health (HIMS 1.87%). The company reports stellar operating results, yet the stock has fallen nearly 30% over the past three months.
But the market's head-scratching reaction could be your opportunity. I'll explain below how the stock, as part of a diversified portfolio, could help you grow your wealth to millionaire status.
People continue flocking to Hims & Hers
Hims & Hers is a personalized telehealth company. Users can meet virtually with professionals on the company's site or app and receive prescription and over-the-counter products delivered to their door. It started with taboo health conditions like hair loss and erectile dysfunction. The company has expanded into new categories, including heart health and weight loss, the most recently announced.
Whether it's the user experience or the expanding list of available care, users are flocking to Hims & Hers. The company has 1.3 million subscribers as of the end of June, up 74% from a year ago. That's an impressive user base, considering the company is only about six years old. Hims & Hers has a shot to end 2023 with 1.5 million subscribers, potentially tripling its customer base in just two years.
On the surface, there isn't anything about Hims & Hers that competitors can't mimic. That's probably the most common argument against the company. However, the numbers don't lie, and it's clear that the company's total package is resonating with users.
The financial fun is just beginning
Young companies often lose money as they try to grow revenue, but ideally, there comes the point when revenue growth begins overtaking expenses, and profits start to take off. Hims & Hers could be starting to ascend. The company has turned free-cash-flow-positive over the first half of 2023, meaning the business is beginning to add cash to the balance sheet.
HIMS Revenue (TTM) data by YCharts.
The company isn't technically profitable yet, primarily due to spending roughly half its revenue on sales and marketing. That may seem alarmingly high, but 85% of customers stick after two years. In other words, investing heavily in acquiring customers makes sense because you can build a lucrative recurring revenue stream.
Its gross margin was a whopping 82% in the second quarter. Once management feels it can ease off customer acquisition, there's a good chance they will slow their marketing spending, and the company could become profitable quickly.
Is there more upside than downside at this price?
Investors must always respect how irrational the market can be. Share prices can always go lower. However, one can look at the numbers and get a feel for how much downside risk there is versus the potential upside.
Management raised its 2023 revenue guidance to $850 million for the entire year. The stock trades at a $1.5 billion market cap today, meaning that the stock is valued at a price-to-sales (P/S) ratio of less than two. That seems very low for a company guiding for 61% revenue growth at more than 80% gross margin.
But even in a scenario where the valuation remains this low moving forward, investors should still see most of the company's long-term growth trickle down as investment returns. Hims & Hers' growth could slow dramatically to 15%, and investors could still see double-digit investment returns. Nothing is guaranteed, but it seems clear that Hims & Hers has a higher chance of delivering a positive investment outcome moving forward than disappointing your portfolio.
In a scenario where things go well over the next five to 10 years, the stock could certainly be part of a diversified portfolio that generates life-changing wealth over the long term.
