Hims & Hers Health (NYSE:HIMS) wasn’t publicly traded a year ago. It’s interesting to think about what would have happened to HIMS stock if it were.
Roughly twelve months ago, the potential impact of the novel coronavirus pandemic was becoming apparent. And investors did what they’ve always done when faced with risk: they sold. In fact, they sold almost everything.
But there were some exceptions. Manufacturers of personal protective equipment, for instance, saw their stock prices rise. So did a few early “pandemic winners” that would benefit immediately from shuttered offices and stay-at-home orders.
It’s not hard to imagine that HIMS stock would have been one of those pandemic winners. In fact, the company’s results show that its business indeed benefited from the pandemic.
Here’s the important thing: the tailwind from the pandemic doesn’t end when the pandemic does. Hims & Hers is here to stay, and that makes HIMS stock a buy, even with a big rally over the past few months.
An Impressive Growth Story
Hims & Hers seems to have one of the best growth stories out there.
Broadly speaking, we know that the telehealth market is going to grow. And that’s not just because of the pandemic. A big catalyst is the fact that the U.S. healthcare system unfortunately doesn’t work that well.
As Hims & Hers itself notes in its Form S-1 filing with the U.S. Securities and Exchange Commission, American spending on healthcare has doubled in the last two decades. Outcomes, however, aren’t improving.
We need a new way. We need more patients seeing more doctors, which will improve all-important preventative care. That’s where telehealth comes in.
Within telehealth, meanwhile, Hims & Hers has a clear path to taking market share. It’s focusing first on large markets that are better-suited to remote visits such as sexual health, dermatology, and mental health. New specialties can and will be added, with sleep disorders and diabetes care among the next targets.
Hims & Hers is targeting the right customers as well. A majority of its patients are millennials. Not only is that generation going to see steadily higher incomes over the next few years, but they’re far more comfortable with app-based systems like that offered here.
All told, this is a company with a smart strategy for targeting a $4 trillion market. Obviously, Hims & Hers is going to address only a small sliver of that market to begin with — but that’s not a bad thing. As its reach expands over time, so will revenue. There’s literally a multi-decade, not a multi-year, runway for growth.
HIMS Stock Is Reasonably Priced
Now, it looks to at least some extent like HIMS stock is pricing in that growth. Revenue for the first three quarters of 2020 came in at $107.3 million. Hims & Hers has a market capitalization nearing $4 billion.
Assuming full-year revenue around $150 million (given likely further growth in Q4), that suggests HIMS is trading in the range of 25x revenue. That doesn’t sound cheap.
But investors need to look at the growth profile. Revenue more than doubled in 2019, and again rose 100%-plus in the first nine months of 2020.
More importantly, this is a company that launched only in 2017. Its revenue has gone from zero to $150 million or so in less than four years.
That kind of growth will bring that valuation down in a hurry. And while the pandemic no doubt helped 2020 performance, it’s not as if top-line increases suddenly stop when normalcy returns. Hims & Hers added revenue because it added customers. Those customers are going to stick around, particularly since many are managing chronic conditions.
A story like this isn’t going to be cheap. What’s important is that, in the context of the growth opportunity, it’s not particularly expensive.
Listen to the Market
I know there are investors out there who think this market is a bubble. I’m not one of those investors.
In my view, the market is focusing on growth over valuation for a good reason: it’s taking the long view. We’re heading into a decade that is going to see multiple ‘megatrends’ that will create massive opportunities for revenue and profits.
Telehealth is one of those megatrends. And that’s why investors are willing to pay up for the likes of HIMS stock.
I don’t think that’s going to change any time soon. When you consider the opportunity here and the valuation, all that’s left is for Hims & Hers to execute. Going from zero to $150 million in revenue in four years seems like an awfully good start.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.