$14.60
$19.00
BUY
2025-2029
2025-2029
2028
At the current price of $14.60, Hims & Hers is a buy with a target of $19.00. The business will continue to capture market share in the growing industry of direct-to-consumer health products. Increased brand recognizability will both increase customer acquisition and promote customer retention. The long-term adjusted EBITDA margin is expected to be 20-30%. With a growing consumer base, the business's long-term prospects remain bright.
Established in 2017, Hims & Hers Health is a direct-to-consumer health company that operates as a consumer-packaged goods firm. The firm offers prescription and non-prescription products that can be purchased for one-time use or monthly deliveries. Hims & Hers promotes products in four main categories: sexual health, skin & hair, weight loss, and mental health. These categories compete against other telehealth companies and pharmacies. It is important to note that the business does not offer health insurance on any product.
Hims & Hers operates in the telehealth industry. The industry is relatively new as direct-to-consumer business has increased in popularity as a substitute for pharmacies. Within the industry, the company offers sexual health products with a TAM of 80M users, dermatology with a TAM of 80M users, mental health with a TAM of 100M users, and weight loss with a TAM of 100M users. Currently, the mental health category dominates the space as consumers look to online resources for their mental health needs and prescriptions.
The telehealth industry is highly competitive. There are low barriers to entry; therefore, there are many competitors with little differentiation. There are also low substitution costs for consumers, which leads to lower pricing power. Hims & Hers attempts to curb these concerns through brand power. The business competes with Roman, BetterHelp, Curology, and legacy pharmacy names such as Walgreens, CVS, and Target. In recent years, Hims & Hers has succeeded in taking market share from its direct competitors as part of the growing industry. Of the observed total customers between primary telehealth providers, Hims & Hers holds a 49% market share. Of the new customers observed among primary telehealth providers, 54% chose Hims & Hers. This growth is an increase from the 2022 figures of 35% and 41%, respectively. The growth results from increased consumers choosing telehealth as a primary provider and increased brand power via extensive marketing. Hims & Hers' value proposition includes providing users with quality service and offering more personalized innovative products.
The business runs a very healthy balance sheet. Despite the large accumulated deficit, Hims & Hers has no debt and is in a significant cash position. The business origins come from the venture capital firm Atomic Labs, which has enabled the business to be flush with cash. Hims & Hers has plenty of room to increase leverage if they wish to do so. Gross margins for the company have expanded in recent years as volume has increased for in-house production of generic drugs. Going forward, however, gross margins are expected to decrease as the business offers more branded products. Operating margins have remained negative, growing in line with revenues. Operating margins are expected to improve as both volumes increase and marketing expenditure decreases as a percentage of revenue.
Capital from investors has been allocated in three significant ways: 1) expanding marketing to attract customers to their platform; 2) developing a world-class platform that provides excellent service to retain customers; and 3) continually developing new products that enable a broader reach and significant upsell opportunities. Though these ideas have been implemented over the last few years and remain a bright spot for the business, Hims & Hers has yet to see meaningful returns from their capital deployment.
The business has experienced extraordinary growth since the firm was founded only seven years ago. They have gained market share from existing pharmacies and become a leading player in other direct-to-consumer telehealth companies. Since the industry is still in its infancy, we think Hims & Hers has more room to grow by taking a more significant portion of the market share. Our valuation model runs on long-term assumptions from the company, goals for fiscal 2024, and industry trends. The subscriber KPI will have a CAGR of 16% through 2028, slowing to a 9% pace in 2028. We also assume that from those subscriber figures, the revenue CAGR will round to 20% through 2028 and slow to a 9% rate in 2028. Customer acquisition expense through marketing continues to be the biggest drag on margins, and these costs remain elevated even as the company's revenues grow. By 2028, Adjusted EBITDA margins will reach 20%. The business cost of capital is 9%, with a terminal growth rate of 3%, which implies a target price of $18.94. A 1% change in their cost of capital will change the discounted cash flow valuation by +/-18%, while a 0.5% change in their terminal growth rate will change the valuation by +/-7.5%. From a multiple perspective, a 12x EV/EBITDA multiple of the 2028 EBITDA will reach a similar price target of $19.77.
The business carries various risks, with a significantly low margin of safety at current trading levels. 1. Valuation risk: The thesis assumes that the business will continue to grow at a heightened level. This assumption is based on continued customer acquisition and a growing trend toward telehealth versus traditional in-person providers. However, a slowdown in expected growth, which could result from overall market trends or low switching costs, threatens these assumptions. 2. Governance Risk: The CEO, Andrew Dudum, owns 10% of the shares; however, he retains the majority of voting rights for the business. The CEO is heavily compensated through salary (reported as $600,000 in 2022) and maintains an SBC plan that targets growth in Adjusted EBITDA, which excludes SBC. The result is a misalignment in incentives between the CEO, the business, and the shareholders.
Considering the current assumptions of the business and industry growth, Hims & Hers Health is a buy. The business has strong tailwinds from the structural change in how consumers engage with their primary physicians. Hims & Hers is currently the primary beneficiary of this change; however, there is a continual need to acquire customers and maintain branding power. The firm's strong balance sheet enables the firm to be flexible, increase leverage, and manage changes in the macroeconomic environment.
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