Hims & Hers: Great Value Amid Unwarranted Concerns (Rating Update) (NYSE:HIMS)

Markets appear to have shaken off fears stemming from talk of a US recession and a revival in Japan’s port trade, but a number of stocks are still near their recent highs. Hims & Hers Health, Inc. (NYSE: EL), the manufacturer and distributor of generic drugs, is one of the most notable names in this bucket. The stock was rocked after reporting its second-quarter results, primarily on concerns that its revenue forecasts for its GLP-1 weight loss compounds are overstated following a potential supply recovery for top brands Wegovy and Ozempic, both produced by Novo. Nordisk.

Year-to-date, Hims is up more than 70% on GLP-1 hopes, but the stock has given back ~35% of those gains compared to recent highs near $25. In my view, it’s a great time for investors to reassess bull case in this company.

GLP-1 concerns are overblown, focus here on long-term drivers

I last wrote an upbeat article about Hims & Hers in June, when the stock was still trading at $20. Since then, the stock has fallen about 25%, while at the same time the company released Q2 results that were accompanied by a substantial increase in its full-year outlook for FY24. As a result of this stark discrepancy, I’m raising my He & She rating to one strong buy.

The company raised its full-year revenue outlook to $1.37-1.40 billion in revenue, or a 57-61% year-over-year increase, from a previous forecast of $1.20-1.23 billion, or only 38-41% growth y/y. It also raised its adjusted EBITDA to $140-155 million, up 16% at the midpoint, from a previous view of $120-135 million.

Needless to say, this is all good news. But amid heightened expectations, the market has raised concerns about the sustainability of the company’s weight loss (GLP-1) business and its expected contribution to overall results. A June short sellers report pointed out that Hims’ weight-loss solutions are a “compound drug” – which use active ingredients similar to brands such as Wegovy and Ozempic, but are not themselves FDA-approved and are mainly sold in supply periods. deficit. Meanwhile, Novo Nordisk has been working hard this year to increase production capacity for its drugs, which could undercut alternatives like Hims once they become more widely available (and potentially at a lower price).

To me, these concerns are overblown for three main reasons:

• Hims & Hers specializes in personalized products. Despite being a compound drug that may intimidate conservative shoppers who want brand-name drugs, Hims & Hers can still win with customers who want personalized drugs that offer all-in-one solutions in one pill (or gummy, on as the company expands). its form factors to suit consumer preferences).
• Hims & Hers still wins on price. According to the company’s Q2 shareholder letter, Hims & Hers offers compound GLP-1 for as low as $199 per month. Meanwhile, without insurance, Wegovy costs more than $1,300 a month. In my view, this means that demand for compounds will not simply fade away when name brands see supply balance, as long as Hims can continue to maintain a price advantage (which has to do with its huge gross margins).
• Weight loss drugs drive only a small portion of the company’s top line. Despite the fact that weight loss is what moved the headlines for Hims & Hers this year, weight loss is not a big factor in the current results. The company reported revenue of $316 million in Q2, but “north of $300 million” of that excluded contributions from recently launched weight-loss drugs.

To me, Hims & Hers is a vast portfolio of generics that spans a wide variety of disciplines, including weight loss – success in this space is more of a “bonus” than an absolute must for Hims & Hers.

Stay long here and use the dip as a buying opportunity.

Download Q2

Let’s now take a closer look at Hims & Hers’ latest quarterly results. The Q2 earnings summary is presented below:

Revenue rose 52% y/y to $315.6 million, crushing Wall Street expectations of $304.1 million (+46% y/y), also accelerating six points from the growth rate of 46 % y/y of T1.

The chart below shows that the company added 155,000 net new subscribers in the quarter, up 43% y/y to 1.86 million subscribers. Average online revenue per subscriber also reached a record average of $57.

Again, we’ll point out here that while the company doesn’t break down its revenue by specialty (its four core specialties are sexual health, mental health, men’s and women’s dermatology, and weight loss), and it just says rather vaguely that each of these will hit “at least $100 million” in revenue this year), noted that ex-GLP 1 growth was “north of $300 million.” According to the company’s color commentary in the shareholder letter:

The strength of our existing offerings was also on display, with revenues of over $300 million in the quarter, excluding contributions from the launch of GLP-1, up over 46% year-over-year.”

Even the 46% growth the company would have achieved without the weight loss contribution would have been extraordinary. The company also noted that it had 785,000 total customers using a personalized product, up 183,000 sequentially from Q1 and representing 160% y/y growth. I continue to believe that while Hims & Hers does not promote radical innovation and is simply a generic drug distributor, the company’s commitment to personalized, lightweight drugs in a wide variety of form factors is its main differentiator.

On the profitability front, we also note that Hims’ adjusted EBITDA grew nearly 4x year-over-year to $39.3 million, representing a record adjusted EBITDA margin of 12.5%.

We note that the company’s adjusted EBITDA outlook for the year, which implies margins in the 10-11% range, may be conservative considering that Q1 and Q2 margins were close to 12%.

Assessment, risks and key takeaways

At current share prices of nearly $16, Hims & Hers trades at a market cap of $3.60 billion. After deducting the $138.0 million in cash from the company’s last balance sheet, the result the enterprise value is $3.46 billion.

Compared to the $147.5 million midpoint of the company’s adjusted EBITDA outlook this year (which again I think is conservative given that it’s at an adjusted EBITDA margin of 10.6% versus 12.5 % in real margins in Q2), shares are trading at EV/FY24 Adjusted EBITDA of 23.4x.

Looking ahead to FY25, Wall Street analysts expect Hims & Hers to generate revenue of $1.89 billion, or 36% YoY growth. Assuming a 12% margin on this revenue profile (in line with Hims & Hers’ actual H1 2024 results and assuming no further margin expansion) would bring us $227 million in adjusted EBITDA ( +54% y/y) and a Adjusted EBITDA multiple of 15.2x EV/FY25.

Hims & Hers is certainly not a value stock, but when we consider that revenues are growing near 40-50% y/y and that the company is growing its adjusted EBITDA dramatically based on an 80%+ gross margin profile, I find plenty of opportunities for this stock to go higher.

Risks are present here, of course. Concerns about Wegovy/Ozempic’s supply recovery could play out, and Novo Nordisk could lower its currently skyrocketing prices: competing more fiercely with Hims’ cheaper generics. A potential US recession could also push consumers to depress wellness, particularly for more “discretionary” issues, and create a number of undiagnosed conditions (similar to what happened during the pandemic when doctor visits slowed down).

However, I continue to see huge upside for Hims & Hers as the company continues to develop various health specialties and lock in the loyalty of its subscribers through easy-to-manage personalized products. Stay here long and buy dip.