Hims & Hers Health - We've Seen This Scenario Play Out Before

For every kind of beast and bird, of reptile and creature of the sea, is tamed and has been tamed by mankind. But no man can tame the tongue. It is an unruly evil, full of deadly poison. With it we bless our God and Father, and with it we curse men, who have been made in the similitude of God.

James 3:7-9

It is interesting to think about this Bible verse. It really is spot on as our words bring both blessings and curses. Because of my sin, while I may desire to do good, I will inevitably do wrong, especially with the words that I say. My heart is selfish and at some point, this imperfection will transfer out through my words. It is just another reminder that a broken and fallen world is incapable of truly doing anything good without God’s influence and help.

The same can be said for investing when it comes to making investment decisions. If I am ruled and controlled by my heart’s desires and emotions, then I will fall victim to the pressures of market influencers and will lose sight of my personal goals and objectives. Just as I must seek the Lord in how I transfer my thoughts and desires verbally, I must also consider God’s precepts for my investment actions versus the alternative random impulses.

Hims & Hers Health, Inc. (HIMS) has been on a tear the past two-plus years. Today, the company finds itself trading 10.4 times enterprise value to sales and 71 times operating cash flow per share. The company is overvalued but has witnessed a substantial amount of revenue growth and cash flow inflection derived from its core operating metrics. I understand that as companies scale quickly, it can be harder for valuation to normalize, but over time normalization will occur.

This is why it is important to develop a financial model to project any company’s mid-term potential to have some visibility as to the degree of valuation relative to pragmatic expectations. Long-term retail investors need these tools to set these expectations as conservatively as possible to avoid downside risk, and benefit from greater upside potential.

Retail investors should see that HIMS is witnessing contradicting operating metric performance. On the one hand, the company is seeing its annual average subscribers and monthly online revenue per average subscriber increase. Combined, these two metrics are the primary drivers for HIMS Online Revenue which is the focal point for retail investors today.

On the other hand, net orders per annualized average subscribers have continued to decline. Right now, this isn’t problematic because HIMS average subscribers and revenue per average subscriber are growing fast enough to moot it.

As HIMS revenue has increased at a robust pace, cash flow inflection has grown to a 15 percent margin. But like all companies, as this inflection increases, each mid-term financial model projection considers the current valuation level against a slowing annualized cash flow growth rate. For high-growth companies, this often leads to substantial drops in the stock price as retail investors wrongly assume that one, growth will continue at a higher rate longer, and/or two, that cash flow inflection margins will increase higher, and as always, three, that the market pivots away from the higher valuation level due either to macro events or the company’s multiples catching up with itself will not happen.  

We need only look at Celsius Holdings, Inc. (CELH) for a quick lesson on the dangers of assuming addressable markets are unlimited when valuations are frothy. CELH is different than HIMS from a business model perspective, but similar as the company witnessed enterprise to sales and operating cash flow per share multiples at 11 and 74 to 90 times respectively.

It is important to note that based on CELH’s business and the timing during the pandemic, that these levels were inflated based on the circumstances of that time. Today, circumstances are different, but nonetheless, HIMS finds itself at a very similar inflated valuation level.

Arguments will be made that HIMS has a longer runway and a higher addressable market, but when factoring for this and assuming HIMS may head towards $5 billion in revenue with a 20 percent operating cash flow margin over the mid-term, retail investors should think better regarding how valuation will play out. Assuming a 30-times cash margin and HIMS could offer retail investors an annualized return of around 11 percent over the next five years based on today’s stock price. This is a much more reasonable assumption versus today's greater than 70 times cash flow.

For those thinking that HIMS should trade at a higher premium for longer, Big-Tech multiples range from 20 to 25 times cash flow and their defensive markets and cash flow margins are substantially greater than HIMS. Retail investors must always remember that greed and fear drive markets and at the moment, greed is driving perspectives for HIMS, as well as many other companies witnessing robust growth.

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