Investors may recall that a couple of years ago companies were going public left and right. However, instead of going through the traditional underwriting process for an initial public offering, many businesses opted for a lesser-known route: merging with a special purpose acquisition company (SPAC).
There were over 800 SPAC deals in 2020 and 2021, more than double the total amount of SPAC transactions from 2003 to 2019. But last year, only 86 companies merged with a SPAC, suggesting the appetite around these deals has cooled off considerably.
Why? Well, unfortunately, many SPAC deals underperformed the broader market after going public. As a result, enthusiasm for these arguably speculative companies waned.
Nevertheless, not all SPAC deals were made equal. A health and wellness company called Hims & Hers Health (HIMS 1.87%) is trading down 60% after merging with a SPAC back in early 2021, but I think the company is overlooked.
Let's break down the business, its financial performance, and valuation. Taken all together, it should become clear why Hims & Hers Health is a good stock to own at these levels.
Taking a look at the business
Hims & Hers Health is a telemedicine provider that connects users with medical experts. The company primarily focuses on treatments for mental health, hair and skin, and allergies, among other areas. In addition to its online prescription channel, the company also sells products directly to consumers in retail outlets such as Target, Walmart, and Walgreens.
Although it's encouraging to see the company supplementing its online platform by penetrating brick-and-mortar outlets, the variety of health supplements in retail pharmacies is already overwhelming. For this reason, it's the company's subscription business that should have investors most bullish.
Image Source: Getty Images
Hims and Hers Health reports revenue across two segments: online and wholesale. In the second quarter, the company reported total revenue of $208 million, up 83% year over year.
Roughly 96% of the company's quarterly and year-to-date revenue comes from online sales. The 87% growth for this segment in the second quarter was largely driven by the addition of new subscribers. As of June 30, Hims & Hers Health boasted 1.3 million total subscribers, representing an increase of 74% year over year.
While the impact of subscriber growth can easily be seen looking at revenue, it's the company's margin profile that has me particularly impressed. For the first six months of the year, Hims & Hers Health reported a gross margin of 81%. That marks a significant expansion from the 75% reported in the prior-year period, and this increase in operating efficiency should not go overlooked.
Hims & Hers Health is guiding for full-year 2023 revenue growth between 58% and 61% with a goal of reaching $1.2 billion in revenue by 2025. Moreover, management also guided for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $100 million in 2025, signaling the company's focus on operating leverage.
Should you buy the stock?
The call for high-double-digit revenue growth plus margin expansion makes the stock look quite attractive, but there is still the valuation to consider.
On this front, there are a number of different metrics to assess. You can see below how Hims & Hers Health's price-to-sales ratio (P/S) ratio has trended over time. Trading at just 2 times sales, the stock's valuation is hovering near its all-time low, and it stands out in a market where many investors are paying 5 times sales (or more) for the level of growth this company is delivering. Even fellow telehealth provider Teladoc is trading at 1.5 times sales after reporting just 10% revenue growth in its latest quarter.
Data by YCharts.
Another metric worth analyzing is its enterprise value. Hims & Hers Health has an enterprise value of $1.3 billion as of this writing. Based on management's $100 million EBITDA target for 2025, the stock sports an EV-to-EBITDA multiple of 12.5. That's not far off from the benchmark 10-times EBITDA many investors look for when assessing this valuation metric.
While there is still a lot to prove, the long-term roadmap for Hims & Hers Health looks encouraging. This appears to be a company overlooked by the market due to the drop in popularity around SPAC stocks. Given its impressive financial strides, upbeat outlook, and current valuation, Hims & Hers stock should at least have a place on your watch list, if not in your portfolio.