Introduction

Back in November 2023, I reiterated Hims & Hers (NYSE:HIMS) as a "Strong Buy" at $6.77 per share, citing robust business performance, gross undervaluation, and bullish technical setup. Since then, HIMS stock has gone virtually parabolic - rising from the mid-single digits to the low-to-mid twenties!

However, soon after registering new all-time highs of $25.74 per share, Hims & Hers' stock dipped by ~15% last week in an ugly reversal of momentum, with no substantial news around the company.

From a technical standpoint, Hims & Hers' stock is trading well above key moving averages whilst forming a bearish negative divergence between price and momentum indicators such as RSI. Hence, a deeper pullback is plausible.

Now, despite the wild run-up in Hims & Hers' stock and its precarious technical setup, I continue to view HIMS stock favorably as a long-term investment. To make my case, I will share Hims & Hers' business trends, long-term outlook, and updated valuation [risk/reward] in this note.

Hims & Hers Business Update

In its latest quarterly report, Hims & Hers recorded revenues of $278M [+46% y/y, +12.5% q/q], powered by robust growth in subscriber count [1.71M, +41% y/y], net orders [2.46M, +20% y/y], and average order value [$109, +21% y/y]. Now, nitpickers will highlight the lack of growth in monthly online revenue per average subscriber as a material weakness in HIMS' report; however, this flattening is a direct result of a larger proportion of the subscriber base opting for multi-month subscriptions [82.7% in Q1 2024 vs. 79.5% in Q3 2023], which itself is a trend spurred by management's strategic pricing initiatives (cuts) on longer-duration subscription plans [initiated in Q3 2023]. In my view, this trade-off (lower monthly revenue per subscriber for higher AOV) is worthwhile, given higher LTV and lower churn.

While these pricing initiatives [passing benefits of scale back to consumers via more affordable offerings] will eventually hurt Hims & Hers' gross margins at some point [long-term gross margins are expected to settle at 75-80%], for now, a larger proportion of prescriptions getting served by HIMS' affiliated facilities (~90% in Q1, up from ~85% in Q4) is offsetting the pricing initiatives - with HIMS' gross margin coming in at +82% in Q1 2024.

Powered by strong top-line momentum and robust margin performance, Hims & Hers is generating significant operating leverage [evidenced by its adj. EBITDA margin of +11.6% (adj. EBITDA: $32.3M) in Q1 2024], enabling its second consecutive GAAP profitable quarter!

In 2023, Hims & Hers generated $47M in free cash flow, and based on management's guidance, the company is expected to maintain robust FCF production (and GAAP profitability) for the foreseeable future. According to management's guidance, Hims & Hers is projected to grow revenues at 38-41% y/y to $1.20-1.23B in 2024, with adj. EBITDA for the full year expected to land at $120-135M (margin of 10-11%).

Management commentary [Q1 2024]:

We are pleased to begin the year with exceptional results and strong momentum throughout the business. Our ability to deliver consistent performance across our key metrics is being fueled by our ability to capitalize on the increasing demand for high quality, personalized solutions in each of our core specialties. During the period, we added a record number of net new subscribers, increasing 41% versus a year ago and bringing us to 1.7 million subscribers on the Hims & Hers platform. We also delivered our first quarter of double-digit net income profitability. As we continue to expand our offerings and broaden awareness of Hims & Hers as a trusted brand, we expect to continue driving rapid and increasingly profitable growth.”

- Andrew Dudum, co-founder and CEO

The business continues to generate robust performance across our operations as we execute on our mission to make the world feel great through the power of better health. Our ability to bring a record number of net new subscribers to the platform while simultaneously driving over 400 basis points of marketing leverage is a testament to the formidable model we are building. We are confident that ongoing investment in a broad offering of high quality, personalized solutions at affordable prices, combined with a trusted brand and best-in-class technology platform, will position us to achieve consistent top and bottom line growth for the foreseeable future. We have updated our full year outlook to reflect the ongoing business momentum and efficiency improvements we are experiencing. These improvements also further bolster our confidence in reaching our long-term Adjusted EBITDA margin goals of 20%-30%.

- Yemi Okupe, CFO

Based on these remarks and past commentary, HIMS' management is looking to get tens of millions of subscribers onto their platform over the long run, whilst expanding EBITDA margins to 20-30% by the end of 2030.

It's time for some rough napkin math:

Considering cross-sells and up-sells, I can visualize HIMS 10x'ing revenues from here within ten years. On $10-12B revenue, if HIMS generates $3-4B in EBITDA/FCF - a 20x P/FCF multiple would lead to a market cap of $60-80B.

Today, HIMS stock is trading at less than $5B in market capitalization, which means we could get a ~12-16x from here in the next 10 years.

Given its humongous opportunity set [large untapped markets within the undisrupted $4T healthcare industry], I am convinced that the Hims & Hers story is just getting started, both from a business and stock perspective.

However, how will Hims & Hers get to 20-30% profit margin from here while growing its user base from 1.7M to say 10-15M?

Given a plethora of telehealth platforms have emerged and failed to truly disrupt the $4T healthcare industry with technology in the past several years, I think the broad skepticism around Hims & Hers' future projections is natural.

That said, over the last couple of years, Hims & Hers has expanded its product portfolio and demonstrated its ability to scale revenues whilst improving its margins and unit economics. In addition to robust top and bottom-line growth, Hims & Hers has built a strong financial foundation to support future business expansion. As of Q1 2024, Hims & Hers had ~$204M in cash & short-term investments and no financial debt. While management's capital allocation priorities are evolving with the business turning into a cash cow, reinvestment into future organic growth remains the No.1 priority at the company.

In my view, the only thing missing from the Hims & Hers story is evidence of a sustainable moat! However, most people fail to recognize that business moats are built over long periods of time. Hims & Hers is just a 6-year-old company, and contrary to popular belief, I think it is building a moat as we speak!

At the heart of Hims & Hers' long-term strategy lies "PERSONALIZATION". In recent quarters, Hims & Hers has announced several intriguing personalized care offerings across different specialties, and consumers seem to be lapping up these offerings, with "%age of subscribers using a personalized product" jumping from <15% in 2021-22 to 35% in Q1 2024.

By providing high-quality, personalized care at affordable rates - Hims & Hers is changing the game. Here's an example:

Last month, Hims & Hers announced the addition of compounded GLP-1 injections to its weight loss/management product:

With ~70% of adult Americans currently overweight or fighting obesity, the demand for GLP-1 weight loss drugs is through the roof right now. Big pharma companies such as Eli Lilly [Zepbound] and Novo Nordisk [Wegovy] are charging thousands of dollars for their GLP-1 injections amid global supply shortages for Semaglutide - the key active ingredient in these injections.

By enabling access to compounded Semaglutide injections starting as low as $199 per month, Hims & Hers is solving obesity for the uninsured and underinsured, i.e., tens of millions of consumers!

While adoption trends won't be clear until later this year, early demand indications are extremely positive - with Hims' YouTube video introducing GLP-1s "Healthcare for Weight Loss That's Personalized to You and Your Needs" garnering 2.5M views since its release 2 weeks ago:

According to Hims & Hers' management, consumers are increasingly choosing them over competitors due to personalized solutions, and looking at the data in the chart below, I now believe "Personalization" across its core specialties is what's going to take Hims & Hers' subscriber count from 1.5M to 10-15M+.

Alright, the subscriber growth part is clear, but how do margins rise from here?

The answer is simple - "Economies of Scale"

Going from an 11% EBITDA margin to a 20-30% EBITDA margin will be challenging; however, Hims & Hers commands robust gross margins of 80%+, so moderation in operating expenses can easily boost bottom-line performance. As the business scales up, the "Hims" & "Hers" brands are likely to evolve into an economic moat, and then network effects can allow the company to moderate marketing spend (as a %age of revenue), which is precisely what HIMS' CFO alluded to during the Q4 2023 earnings call -

While further leverage is expected across costs such as G&A and operations and support, a substantial portion of leverage is expected to come from marketing. Our expectation is that marketing as a percentage of revenue will be in the mid-30s to low-40s by 2030.

Several factors give us conviction in our ability to drive marketing leverage over time. First, a greater share of our spend is increasingly becoming more semi-fixed in nature. In 2022, and over the course of 2023, we meaningfully scaled investment in broad-based brand spend intended to drive awareness and consideration of our brand to users earlier in their lifecycle journey. As it starts to hit maturity in 2024, we are confident in our ability to get greater leverage on this spend.

Second, our belief is that we can increase conversion and retention by offering consumers high-quality personalized solutions. We have already seen early signs of success that offering personalized solutions enables us to better convert users as well as increase their longevity on the platform. This is especially true when they are placed at attractive price points as we saw in the second quarter of 2023.

As our personalized solutions continue to evolve to encompass multi-condition treatments as well as new form factors and scale enables us to place them at more attractive price points, our expectations that we will see continued gains in both conversion and retention.

Lastly, our business is based on a recurring revenue model and the majority of marketing spend goes towards the acquisition of new users. As our user base continues to mature and the average tenure of users on the platform increases, our expectation is that we will gain leverage. These dynamics are expected to drive between one to three points of marketing leverage per year with leverage starting to show as early as 2024.

2023 was an exceptional year for Hims & Hers. Momentum looks to be stronger than ever as we head into 2024. We have high conviction that our strategy of providing users with access to high-quality, personalized solutions that are affordable and backed by an experience that is delightful from beginning to end will position us for continued success in the coming years.

- Yemi Okupe, CFO

While management presented their path & timeline to 20-30% EBITDA margins in early 2024, we have been modeling for an optimized FCF margin of 35% for Hims & Hers for more than a year now! That said, I am happy to get this positive long-term update from the management, as it validates our long-term thinking around margins.

From a tech disruption standpoint, the healthcare market remains largely untapped, and Hims & Hers is well-positioned to fulfill its goal of becoming the most trusted health & wellness brand in the US. By providing high-quality, personalized care at affordable rates, I believe Hims & Hers can and will achieve its lofty goal of serving "tens of millions" of subscribers.

Now, let's re-evaluate Hims & Hers using our proprietary valuation model to determine the company's fair value and 5-year CAGR expected returns.

Is Hims & Hers Still A Strong Buy?

In light of HIMS guiding for ~40% top-line growth in 2024 (before the GLP-1 announcement), our 5-year CAGR sales growth assumption of 20% looks rather conservative. With GLP-1 compounds coming to Hims & Hers, hypergrowth may continue for another year or two. However, I feel comfortable modeling the business for $1.25B 2024E revenue and 20% growth for the next five years. While our growth assumptions may prove to be overly conservative given HIMS' opportunity set, we will continue to model conservatively, as doing so gives us a margin of safety.

On the margin front, HIMS' management reiterated their long-term 20-30% EBITDA margin goal and expressed confidence about achieving these numbers by 2030 based on potential operating leverage from marketing. With long-term gross margins likely to settle at 75-80%, I think Hims & Hers could do even better on the margin front when the business reaches steady-state terminal growth. Hence, I am sticking with our optimized FCF margin assumption of 35%.

All other assumptions are straightforward, but if you have any questions, thoughts, and/or concerns, please share them in the comments below.

Here's our updated valuation model:

According to these results, Hims & Hers is worth $49.5 per share, and investors buying in here could expect to generate a CAGR return of ~36% over the next five years [based on a conservative exit multiple of 20x P/FCF].

While HIMS is not as attractive as it was in the mid-single digits, the stock is still massively undervalued, and long-term risk/reward remains lucrative. Given Hims & Hers' robust business performance and gross undervaluation, I continue to view HIMS stock as a "Strong Buy" for long-term investors at current levels.

Key Takeaway: Hims & Hers is a "Strong Buy" in the low $20s.

Thanks for reading, and happy investing. Please share your thoughts, questions, or concerns in the comments section below.