Hummus servingsNew York Stock Exchange: HIMS) lagged behind the market and fell after the stock’s initial writing in April. At the time, I thought the stock looked cheap and so did the company He has a number of opportunities. However, I was also concerned that the business model could be subject to scrutiny.
As a quick reminder, HIMS is a telemedicine platform that focuses on prescribing medications for men’s health problems, such as erectile dysfunction, sexually transmitted diseases, and PE. It has also moved into women’s health by describing birth control pills, libido enhancers, and sexually transmitted diseases, as well as other areas such as dermatology and mental health.
Most of the company’s prescriptions are sold through subscriptions delivered by mail-order pharmacies. Subscription can be monthly or less frequently. The company does not hire Doctors live on its platform, but the medical groups that serve the company were created with the sole purpose of providing services to HIMS.
After selling profits
Despite announcing strong first-quarter earnings and raising its guidance for the full year, HIMS saw its stock decline -11.5% in the session after its report. The stock has been steadily trending lower, and is now down over 20% since the report.
Despite the inventory weakness, the quarterly results were really impressive. One area in my initial writing that I noticed HIMS was doing a good job with was new customer acquisition. That continued in the first quarter, as the company saw its subscriber count grow 87% year-over-year to 1.209 million subscribers. On a sequential basis, our subscriber count grew over 16% from 1.040 million at the end of 2022.
The company launched a multi-channel marketing campaign with actress Kristen Bell during the quarter and also began to rely more heavily on branding campaigns, which helped subscription growth. Of course, working in conjunction with your subscriber growth makes this very cost-effective. On this front, the company said it is diversifying its marketing channels into brand ads and ambassadors adding that the return will be longer because these marketing investments are long-term in nature. However, it still expects its collective marketing efforts to drive a one-year payback period. It also indicated that it was witnessing so far in 2023 a favorable customer acquisition environment that it expects to continue throughout the year.
Investments in building their brand and brand make sense in the long run, even if the initial return isn’t as good as some other channels like performance marketing. There are a number of online pharmacies that sell the same or similar product as HIMS, so if a company can build their brand, they should be able to attract more business over time and not just compete on price, performance and placement.
As the company moves into other categories such as mental health and dermatology, brand awareness can become even more important, as HIMS will want to be seen as a brand that consumers can trust. Building a brand takes time, but once brand ownership becomes a powerful marketing tool in its own right.
The growth of her women’s health business was another area I talked about in my initial write-up. Unfortunately, HIMS didn’t detail what this category was like or provide much commentary about it. I find this a little disappointing and I think more metrics in the new categories could help the stock (if it performs well). There is only a significant portion of the market share in the sale of drugs for ED and hair loss, so growing these other categories is very important in the long run.
Overall, there doesn’t seem to be much to complain about with HIMS quarterly results and guidance for information if provided. It outperformed the top line by $11.7 million, with revenue growing 88% to $190.8 million. At the same time, it raised revenue guidance for the full year to $810-830 million from a previous forecast of $735-755 million. And the guidance took our full-year adjusted EBITDA guidance from $20-30 million to $25-30 million.
At one point next quarter guidance could hurt stocks, but on that front HIM’s outlook has also been strong. I was guided by second quarter sales of $200-205 million, which easily beat the consensus of $183.3 million. It is also looking for a positive EBITDA of $4-7 million.
It’s not often that you see a company raise revenue guidance by about 10% and see the stock struggle. A lack of transparency with newer categories and not raising EBITDA guidance may be behind the weakness, but it doesn’t seem like a good explanation. Obviously, there is still some investor skepticism when it comes to the stock.
HIMS currently trades at about 60 times the FY2023 EBITDA of $28.9 million and about 27 times the fiscal year 2024 consensus of $64.4 million.
It is trading at a PE forward rate of more than 70 times the 2023 consensus of 13 cents and nearly 34 times the 2024 consensus of 27 cents.
With margins in the mid-70s, HIMS can also be viewed at a P/S multiple. On that front, it trades 2.3x, 2023 revenue estimates of $827.4 million, and less than 1.9x 2024 revenue of $1.033 billion.
Revenue growth is expected to be 57% this year, then grow by about 25% in 2024.
From a price-to-price ratio, the company trades toward the lower end of the pack versus peers, despite its high growth rate.
When I got a Neutral rating on HIMS shares, it was despite the fact that I thought the company could continue to put up strong results in the near to medium term. In the meantime, I thought the valuation looked attractive, and now it’s even more attractive after the stock has gone down and the guidance has been lifted.
However, questions remain about its business model and whether it will be able to successfully transition into other categories. More transparency into the growth of categories outside of Men’s Health could go a long way in making investors more comfortable with the name. Personally, I’d like to get some more insight into this area before I get more stock-based.
For now, I’m still agnostic about the name.