Him and his health (NYSE: HIM) is a telehealth company that focuses on providing high-quality, easy-to-access healthcare, primarily for stigmatized disorders. The company’s target demographics are millennials and Gen Z. The company is in its fifth year of operation and went public via PSPC in 2021. Since then, the stock price has fallen from $25 to around $5 today, which is an 80% drop.
Why did the stock price drop?
There are a few aggregate-based explanations for why Hims fell:
- All major indexes have fallen significantly.
- Rates have risen, reducing the future value of growth stocks the most.
- Investors are simply wrong and too negative in their forecasts of the company’s future earnings.
My rebuttal to the three reasons is as follows:
- It’s a stock market, not a stock market. If a company’s profits increase, its stock price will also increase. The global market being viscous could delay stock appreciation, but cannot do so indefinitely. Ultimately, Hims stock price will reflect its true potential (as long as the company continues to run).
- The value of a business is calculated by discounting all of its future cash flows. The further a company’s projected cash flows are into the future, the greater the mathematical impact interest rates have. Hims should be profitable as soon as possible if the company continues on its trajectory. As such, its future cash flows are closer than investors perceive, and the stock price will benefit greatly once they factor in this realization.
- Investors who think the business will not be profitable are wrong. The fact that Hims could be profitable today if it simply reduced its marketing spend reveals that the company can already be considered profitable (for valuation purposes). As increased marketing spend translates into increased sales (and retention rates), the company’s revenue will seep into its bottom line.
I often hear investors complaining that Hims doesn’t have a moat and will therefore be swallowed up by larger competitors such as CVS (CVS) or Amazon (AMZN). What critics don’t understand is that the moat comes second – the value proposition comes first. Investors who ask where the moat is are putting the “cart before the horse”.
It can be argued that any company did not have a moat in the beginning. What gap did NIKE (NKE) have at the start? Anyone could start a sportswear brand. After all, adidas (OTCQX:ADDYY, OTCQX:ADDDF) was fifteen years ahead of Nike. I’m sure skeptical investors back then said that Nike didn’t have a moat and that Adidas could top them.
The value proposition is what matters. If Hims provides patients with high quality and convenient health care at the lowest price, it will produce a profit. By making a profit, the company will expand its capabilities and infrastructure while becoming more efficient. This is what people refer to when they talk about the “moat” – it’s a company’s competitive advantages that derive from its capabilities, infrastructure and efficiency. In other words, the value proposition creates the moat. It is illogical and non-chronological for a fluke to create value.
Vertical integration of Hims
One of the keys to Hims’ value proposition and moat is the company’s ability to vertically integrate. Management has demonstrated that it recognizes this key and is making progress towards this goal.
The company’s main touchpoint is its new mobile app, which allows patients to get a medical consultation directly from the app with just a few clicks. These views grew at a CAGR of nearly 130% from 2018 to 2021.
Branded products and distribution centers to ship them
The company derives much of its sales from its own branded products and custom forms rather than relying solely on third-party drugmakers. The company has two in-house fulfillment centers, one in Ohio and the other in Arizona, which handle over 50% of orders.
Although these are preliminary steps towards vertical integration, it demonstrates that the company is heading in the right direction and understands the importance of this strategy.
I believe the company is worth $18.20 per share, which is more than triple current levels.
I think revenue growth in 2022 will be $544 million. This represents a 100% increase over 2021 revenue of $272 million. Many readers have commented that this is too high and I disagree.
From the graph above, we can see that the company increased its revenue by 16.6% CAGR per quarter from Q1 2019 to Q1 2022. This was achieved without the primary catalyst of mobile app , not to mention the absence of thousands of new retail touchpoints.
Simply extrapolating each quarter of this year to a growth rate of 16.6% leaves us with these forecasts:
Q1 2022: $101 million
Q2 2022: $118 million
Q3 2022: $137 million
Q4 2022: $160 million
Adding my projected revenues equals $516 million. I think the extra “umph” to reach $544 million will come from the mobile app; I think investors seriously underestimate the revenue generating power of the app.
Discounted cash flow model
Before diving into the details, I want to emphasize that evaluation is an art, not a science. Two investors analyzing the same stock separately will almost certainly come up with two different valuations.
Cost of goods sold and gross margins are two sides of the same coin. Hims gross margin for 2021 was 75%. For 2022, I forecast a gross margin rate of 73%. From there, I gradually lowered it over the next few years. Hims has expanded into many retail channels (Amazon, CVS, Walmart (WMT), etc.) and sales from these channels generate lower margins. Therefore, it is wise to factor this into the forecast.
The company’s SGA spend as a percentage of sales was 117% in 2021. I assumed this would stay the same in 2022 and then gradually improve as overall sales exceed spend at that level.
Taxes, net turnover, CAPX
I kept the same tax rate, moved net current assets from negative to positive over time, and quickly increased the company’s CAPX to account for its increased need infrastructure as the business grows.
WACC, terminal growth rate
The WACC was calculated at 11.71% using the CAPM model. The terminal growth rate is set at 2% for reasons of prudence.
I predict future cash flows will total $3.52 billion in present value dollars. Dividing each dollar by the current shares outstanding yields a share price of $18.20.
The Case of the Extreme Bear It’s that the company never becomes profitable and slowly returns to its cash position, which is currently $1 per share. The cash position acts as a temporary floor on a stock’s price. However, the cash position is dynamic and subject to change, so the floor would ultimately be $0 per share if the company continues to lose money.
The case of the extreme bull This is when the company quickly becomes profitable and the market begins to attribute growth multiples to the stock. Tied to a PE of 20-40, the stock could become a 10-bagger or more from current levels.
To be conservative, I’d put those two results out of your mind for now (easier said than done). Although, I will say that I believe the latter is much more likely than the former. I absolutely see the potential for this stock to be a 10-20 bagger (in the distant future).
Buying shares of Hims involves many risks. A few of them are the following, although incomplete:
- The company does not realize the expected profitability.
- Interest rates rise dramatically, reducing the ability of the business to grow, which will reduce future profitability (if any).
- The government may decide to regulate telehealth companies more closely.
- Large corporations are entering the telehealth space, leveraging their scale.
- Retention rates suffer, and Hims enters an endless cycle of marketing spend to acquire new customers.
- For a list of potential business risks, click here.
An investment in Hims offers investors the opportunity to step inside one of the potentially most disruptive companies in the industry. Healthcare is apparently one of the latest sectors to be revolutionized by technology. Hims is at the forefront of this trend and is showing strong signs of profitability as soon as possible. The company continues to execute, grow, acquire new customers and integrate vertically. I think the fair stock price is around $18, which offers 2-3x the potential for ROI. Investors who understand the risks should consider further researching Hims.