Hims & Hers Health (HIMS 1.87%) is a telehealth company that went public through a special purpose acquisition company in 2021. Through a subscription model, it helps provide patients with access to medications they need. It focuses on sensitive areas of healthcare, including erectile dysfunction and hair loss.
That strategy has been paying off as Hims & Hers has been growing its top line and shrinking its losses in recent years. The big question is, where will the business be five years from now, and is it worth buying and holding the stock until then?
Business should get broader
Hims & Hers has been focusing on niche areas of healthcare but for the business to continue growing, it will need to diversify. And the company is doing that already. Recently, it announced an expansion into cardiovascular health.
It is going to have "dual-action capabilities," meaning that the company will have personalized treatment plans addressing sexual health issues such as erectile dysfunction while also helping address cardiovascular issues -- with just a single pill.
Weight management is another category that it plans to expand into later this year. Given the excitement surrounding Ozempic and weight-loss drugs in general in recent years, this could be a huge growth opportunity for Hims & Hers. Down the road, there are other areas that the company is also eyeing, including pain management, fertility, and diabetes.
Hims & Hers has built up trust with its existing patients and created personalized treatment plans, advantages that can pave the way for the business to effectively upsell an existing customer and address more than just one issue.
Its growth rate will likely come down
The business's growth has been fast and furious. Sales in its latest quarter, for the period ended June 30, totaled $207.9 million and grew at a remarkable 83% year over year. While the company has more growth opportunities on the horizon, as it gets larger that growth rate will inevitably slow down.
HIMS Revenue (Quarterly YoY Growth) data by YCharts
Another challenge will be for Hims & Hers to protect its gross margin, which is normally around 80% or better. But if the company becomes broader, it will be competing against more businesses. As a result, it may have to lower prices for the sake of being more competitive, leading to a lower gross margin.
The benefit is that it can get more customers and subscribers, but the downside is that it could be difficult for the business to grow its bottom line. The good news is the company is already near breakeven -- its net loss last quarter was $7.2 million, down from $19.7 million in the same period last year. Hims & Hers can afford to take a hit to its margins in the future and still be profitable.
Will Hims & Hers get acquired?
What could very well happen five years from now is that Hims & Hers becomes part of another, larger business. The company has an attractive business model that centers around subscriptions and recurring monthly purchases. Last quarter, its subscriber count hit 1.3 million, which was up a staggering 74% year over year.
The company's explosive growth coupled with its strong margins and near-profitability makes Hims & Hers a potentially lucrative business for a larger company to acquire. The healthcare stock only has a market capitalization of $1.3 billion and trades at less than 2 times its trailing revenue. There's good value here for a larger healthcare company such as CVS Health to expand its telehealth offerings or for e-commerce giant Amazon to buy the company in order to get deeper into healthcare.
Should you buy Hims & Hers stock?
Hims & Hers has plenty of potential to become a bigger business five years from now. Its operations are expanding, and simplifying treatment options for people into a single pill could be incredibly attractive to prospective customers. Even if its growth rate does slow down, Hims & Hers has the potential to remain a relatively fast-growing business five years from now.
For investors, this is one of the better buys in healthcare and the stock's relatively low valuation could lead to significant returns in the long run.
