To The Moon

$Hims & Hers Health Inc.(HIMS)$

A new stock is growing its revenue at an impressive rate of approximately 90% year-over-year, while trading at just 16 times free cash flow. This represents one of the most significant disconnects I’ve ever seen between growth and valuation in the stock market. Additionally, the company boasts a strong balance sheet and 80% gross margins, comparable to leading software firms like Adobe.

The stock in question is Hims, and in this article, I’ll provide a brief overview of why I recently invested in this business. Before diving into the details, This deep dive will include a comprehensive look at the company and my full investment thesis.

Hims is currently experiencing a 30% correction from its all-time highs, yet it remains up 153% year-to-date. Despite this strong performance, I believe the stock is still undervalued.

What Does Hims Do?

Hims & Hers is a leading health and wellness platform dedicated to helping individuals feel their best through better health. The company’s mission is to remove barriers to wellness by providing affordable and personalized care. Hims normalizes health and wellness challenges, offering innovative solutions that make feeling happy and healthy more achievable.

According to their investor materials, Hims addresses a fundamental issue in the U.S. healthcare system: the high cost of treatment. For instance, GLP-1 drugs, used for weight management, often cost over $1,000 per month—making them inaccessible for many Americans. Hims offers these treatments at a fraction of the cost, with prices starting as low as $79 per month for holistic solutions and $199 per month for compounded GLP-1 drugs. This pricing structure makes these treatments accessible to a much broader audience.

Earning Overview

Examining Hims' quarterly revenue, the company has achieved impressive growth since its first reported quarter in Q3 2021, when it generated $52.3 million. By Q3 2024, quarterly revenue had risen to $417.67 million—an 8x increase in just three years. This rapid growth is reflected in the company’s accelerating revenue growth rates.

Hims' trailing 12-month free cash flow now stands at approximately $150 million, marking a clear transition from negative to highly positive free cash flow. In Q3 2024 alone, Hims recorded a record $80 million in free cash flow.

Fundamental Analysis

Hims has seen remarkable growth due to its affordability, convenience, and personalized care. Unlike traditional healthcare systems, Hims eliminates the need for in-person doctor visits or pharmacy trips, offering a streamlined and cost-effective approach. The company’s subscriber base has grown to 2.05 million, a 44% year-over-year increase. Additionally, revenue per subscriber is up 24%, contributing to an overall 77% revenue growth in Q3.

Operating cash flow for the quarter was $85.3 million (up 238% year-over-year), and free cash flow reached $79.4 million (up 312%). Gross profit came in at $318 million, with a gross margin of 79%. While this margin is slightly down from 83% last year due to the expansion of product offerings, it highlights the company’s strategy to scale its platform.

Marketing Expense and Profit Potential

One noteworthy point on the income statement is the $182 million spent on marketing in Q3—more than half of the company’s gross profits. If Hims were to reduce this expense by half, it could generate an additional $90 million in free cash flow per quarter. This underscores the company’s untapped profit potential once it shifts from aggressive growth to a more mature phase.

Currently, the marketing expense serves as a growth driver, effectively increasing subscriber count and revenue. It’s clear that the investment in marketing is paying off, as evidenced by the company’s impressive growth metrics.

Currently, I support Hims' decision to allocate a significant portion of its budget to marketing. Over time, I expect this expense to decrease as the company matures.

Looking at the income statement, we notice that the company's diluted shares outstanding increased to 235 million, up from 100.8 million last year—a 133% year-over-year growth. As many of you know, I view this level of dilution as a negative. However, I believe the rate of dilution will slow down moving forward. The recent spike in dilution was likely driven by stock-based compensation, compounded by Hims’ previously low share price, which amplified the effect. In the future, as stock-based compensation becomes less significant, I anticipate a decline in dilution.

Balance Sheet Analysis

Hims has a strong balance sheet, with $166 million in cash and cash equivalents compared to total liabilities of $162 million. This means the company could theoretically pay off all its liabilities with its current cash reserves, leaving it debt-free. This highlights the company’s financial strength and lack of distress.

Free Cash Flow

Turning to the cash flow statement, we see that stock-based compensation year-to-date is approximately $68 million, up from $48.3 million last year—a 50% increase. In comparison, operating cash flow has grown from $52 million last year to $165 million year-to-date, effectively tripling.

To put this into perspective, last year, stock-based compensation was nearly 100% of the company's operating cash flow. This year, however, it represents only about 40%. As operating and free cash flows continue to grow faster than stock-based compensation, the impact of stock-based compensation on the business will diminish over time—a key part of my thesis for this investment.

Year-to-date, capital expenditures have totaled just $17 million, allowing Hims to generate approximately $147 million in free cash flow. Of this, $80 million was produced in Q3 alone. Additionally, the company has allocated $78 million toward share buybacks, utilizing its free cash flow to repurchase shares—a strategy I support, as I believe the stock remains undervalued.

Risk & Challenges

A common concern about Hims is its reliance on a single GLP-1 weight-loss drug. Currently, Hims can produce and sell this drug due to its inclusion on the FDA's shortage list. However, once the shortage is resolved, there is speculation that Hims may lose the ability to offer this product on its platform.

I explored this issue further to evaluate its potential impact on Hims' business. According to the company, subscriber growth remains primarily driven by non-GLP-1-related offerings. While the GLP-1 drug has attracted incremental users, non-GLP-1 subscriptions accounted for a substantial 40% year-over-year growth. Overall, the company’s total subscriber base grew 44% year-over-year, with non-GLP-1 offerings making up the majority of this growth.

The majority of Hims' growth is driven by its non-GLP-1 business. In the next screenshot, Hims highlights this point, stating that revenue from its existing offerings (excluding contributions from the GLP-1 launch) exceeded $300 million in Q3, reflecting a 46% year-over-year increase. This indicates that Hims' non-GLP-1 revenue alone grew significantly, showcasing the company's robust performance outside the GLP-1 segment.

Based on my estimates, GLP-1-related revenue accounts for approximately 5-8% of the company’s total revenue. While the GLP-1 products contribute to revenue growth and provide a boost, they are not the primary driver of the company’s success. With over $300 million in non-GLP-1 revenue and a 46% year-over-year growth rate, Hims demonstrates strong growth across its broader portfolio. GLP-1 offerings are a beneficial addition but not critical to the company’s sustained growth.

Guidance

Looking ahead, Hims projects approximately $468 million in revenue for Q4 2024, representing a 90% year-over-year increase. For comparison, revenue growth in Q3 2024 was 77%. This acceleration in growth is an encouraging sign of the company’s trajectory.

Valuation

To value the business, I annualized the most recent quarter's free cash flow by multiplying $80 million by four, estimating an annualized free cash flow of $320 million. With 235 million shares outstanding and a current share price of $24.8, Hims' market capitalization is $5.68 billion. Dividing this by the annualized free cash flow gives a price-to-free-cash-flow (P/FCF) ratio of 17.8.

This valuation is particularly compelling given the company’s 90% revenue growth rate. Typically, a P/FCF ratio of 18 would correspond to a company with modest growth (e.g., 5-10%). Businesses growing at 90% often trade at 40-50x free cash flow. This disconnect in valuation highlights the market's bearish stance on Hims, despite its strong balance sheet, high margins, exceptional growth, and profitability.

Marketing Spend and Additional Insights

Hims currently allocates $182 million per quarter to marketing. If the company reduced this expense, it could significantly boost free cash flow. The market appears to undervalue Hims, creating a unique opportunity for investors.

Conclusion

Hims is transforming the healthcare space by making treatments more affordable and accessible. Its strong growth, solid financials, and innovative approach position it as a compelling investment opportunity. I’m excited to see how the business evolves and will share more details in my upcoming deep dive.

Hims' financial performance and strategic decisions showcase its growth potential and resilience. Despite concerns over GLP-1 offerings, the company's subscriber base is expanding significantly across various categories, demonstrating strong demand for its platform. With robust free cash flow, a solid balance sheet, and a commitment to share buybacks, Hims is well-positioned for long-term success.

For these reasons, I’ve think if Hims stock remains in its current price range, we can open a new position.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub