This time two years ago, we were in such a different world -- the SPAC bubble was inflating. "Promising" disruptive companies were making deals to go public via reverse mergers at an unprecedented pace. And Wall Street's favorite types of businesses were EV startups of course because of their promises to become the next Tesla ($TSLA). In fact, in November 2020, EV startup Arrival ($ARVL) made a deal to go public via SPAC at a $5.4 billion valuation. It promised to disrupt the entire car making process.
Fast forward to today, and guess what? ARVL is worth less than $300 million 📉. In its Q3 earnings results, yesterday, it warned investors that it may not be able to continue operating for long as its cash on hand is sufficient for only a couple of months.
Arrival is only one of the SPAC bubbles that is now bursting. For this reason, SPAC-listed companies have become notorious for being low quality and speculative. While in many cases it is true, it’s unfair to call all SPAC-listed companies junk or speculative. Hims & Hers ($HIMS) is also a SPAC-listed firm that completed its merger in January 2021. Yesterday the stock spiked nearly 20% after its Q3 earnings and forward guidance easily beat analyst forecasts.
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The digital health company is doing great even amid the current economic uncertainty primarily because it offers products for conditions that are highly emotional and people don't want to skip their treatments. Also, HIMS makes the bulk of its revenue from high-margin recurring subscriptions and is growing so fast that it has achieved significant economies of scale that will help it become profitable soon.
Despite the bad reputation of companies that opt for the SPAC route to go public, HIMS seems to be very different. The stock has performed poorly so far because of the overall market weakness and investor skepticism but given the stellar fundamental performance and the huge addressable market, the stock is not going to stay at single digits for long.
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Healthcare & Wellness In The 21st Century
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Hims & Hers was founded in 2017 and it was originally only Hims. The founders started the online health company by offering treatment for conditions that patients often feel uncomfortable talking about, like sexual health. The platform was highly successful from the very beginning because it combined privacy with a smooth and personalized telehealth experience.
After the early success with Hims, in late 2018 the company launched Hers, a brand targeted to women, selling primarily birth control pills. Hers was also successful because of the privacy and the millennial-friendly personalized experience. In other words, Hims & Hers has achieved massive growth in a very short period of time because it offers a differentiated healthcare experience.
HIMS is fully verticalized, meaning that it offers an end-to-end experience. It's not just a telehealth company that connects patients with physicians but it's also a cloud pharmacy, a wellness brand, and an online learning platform. Every patient answers a couple of questions about his or her condition, talks to the right professional for free, and if a prescription is required, the patient receives it from the company. The entire user experience is 100% digital, personalized, and user-friendly as the patient can manage everything through the Hims or Hers apps.
The company makes money primarily through subscriptions to prescription and over-the-counter drugs, as well as personal care products. Over 90% of its revenue is recurring subscriptions and 85% of its customers remain subscribed for at least two years. This clearly shows that the personalized, fully-digital experience resonates with customers, the majority of whom are millennials.
HIMS focuses primarily on chronic conditions, which is what makes the subscription model work. Also, it targets conditions that are often stigmatized like infertility and mental health issues that people prefer to solve in private. For such conditions, telehealth is probably the best possible solution and HIMS is the next-gen platform that is positioning itself as the leader in this space.
Its millennial customer base is very important because these people are at the beginning of their healthcare journey. In the coming decades, millennials will make up the majority of healthcare spend, and if HIMS becomes a trusted healthcare partner today, it's going to win big in the coming years. So far, the customer metrics show that people love the modern, fully digital experience, which is a very encouraging sign for the future of the company.
Obviously, HIMS is going to face increasing competition in the future ⚔️, as healthcare is a massive trillion $ market and is ripe for disruption as many people are dissatisfied with the current state of the industry. While Amazon's ($AMZN) digital health venture Amazon Care has failed, the company is not going to give up so fast. HIMS will likely see new telehealth competitors in the future but until then, it'll continue to gain market share and build its brand awareness. And for now, it's the only end-to-end platform for highly emotional chronic conditions.
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Hyper Growth And Economies Of Scale
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HIMS has a very attractive subscription-based model. The platform is already quite sticky as its customers remain subscribed for years and is going to become even more sticky in the future as the company expands into new chronic conditions.
Its current offerings are growing extremely fast, highlighting the significant growth potential in the years ahead. In Q2, HIMS delivered revenue growth of 95% y/y to $145 million, beating analyst forecasts by $15 million. This was an acceleration vs. the Q2 growth of 87% and the full-year 2021 revenue growth of 83%.
As you can see below, the growth was driven primarily by the stellar growth of its subscriber base. Q3 subs jumped 80% y/y to 991K. On top of that, the average order value (AOV) increased by $9 to $83 primarily because more subs opted for multi-month billing instead of monthly payments.
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The other revenue driver during the quarter was the wholesale channel. HIMS makes a small portion of its revenue, around 3.4%, from sales through retailers such as Target ($TGT). The company's goal is to actually increase its brand awareness rather than to grow through third-party retailers. In Q3, wholesale sales jumped 138% y/y to $5 million, which shows that HIMS is achieving a dual goal of boosting its brand awareness while increasing its sales at the same time.
The most impressive thing about HIMS is its rapid progress toward breakeven. The company is achieving phenomenal operating leverage that will allow it to become adjusted EBITDA profitable in the next quarter 👀. It's a unique achievement for a company growing nearly 100% a year. As you can see below, the company has been making consistent progress toward breakeven. In Q3, its adjusted profit margin that excludes stock-based comp improved to -4.2% from -13.2% a year ago.
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The main drivers behind the improving operating efficiency are its growing gross profit margins and the scalable operations. In Q3, HIMS increased its gross margin to 79% from 74% in the year-ago quarter as its rapidly growing operations allowed the company to renegotiate its biggest costs such as shipping and manufacturing. Also, with the exception of marketing costs that increased 105% y/y in Q3, all other operating expenses such as general and administrative increased significantly slower revenue, helping HIMS move closer to profitability. This positive trajectory is expected to continue for the foreseeable future as the company is still very young and has just started to gain operating leverage.
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HIMS's stock was ignored by the market for the first several months after it completed its SPAC merger and for a good reason. Wall Street was skeptical given the low quality of most SPAC-listed companies. But now investors have started to slowly realize that HIMS is not the typical blank check-listed firm. This is why the stock has rallied 115% over the past six months.
But HIMS is still a very cheap stock that deserves to trade at even higher prices. At current levels of about $5.80 per share, Hims & Hers trades at a P/S ratio of 2.6. It's a very cheap multiple for a hyper-growth subscription company that makes rapid progress toward profitability.
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After the stellar Q3 earnings HIMS boosted both its top-line and bottom-line projections for the year. It now expects to grow its full-year revenue by at least 91%, 15% faster than the previous forecast, which highlights the strong growth momentum. And it expects to deliver its first quarter of positive adjusted EBITDA in Q4, meaning that it can easily achieve non-adjusted profitability next year. Given these great fundamentals, HIMS stock could trade up to 5x sales, which translates into a stock price of $12.5, up 116% from current prices.
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Hims & Hers is still a relatively small company with a market value of around $1.2 billion. This will allow it to enjoy rapid revenue growth for many years as healthcare is a massive market and millennials have limited loyalty to the traditional health system. The strong performance especially in the current tough environment shows that the company is well-positioned to win big. The stock has already started to react to the positive fundamental performance and the cheap valuation leaves significant upside potential.
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HIMS & HERS RATING
Short Term: Buy
Long Term: Buy
🎯Price Target: $12.5
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I've no positions in the stocks mentioned.
The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.
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