Understanding The Hims & Hers Health Thesis

In this brief introduction, I will share with you the core elements of the Hims & Hers Health thesis (Hims for short), beginning with a graphic overview of how the app works.

Importantly, this Q2'24 review, in its entirety, will serve to elaborate the core elements of the Hims thesis, which I will share with you in a series of bullet points in a moment.

We will explore the history of the company, the underlying business philosophies that explain why Hims is attractive, and we will address various points of concern related to the business, such as its relationship with the latest pharmaceutical craze, GLP-1s, and its churn dynamics.

We will then conclude with a valuation exercise, in which I will share with you a series of assumptions that inform my view of the prospective forward returns that Hims offers today (remember, risk = return, and there are no guarantees in business).

So, without further ado, let's begin!

How Hims & Hers Health Works

In the graphic below, we can see an example of a patient's intake, analysis, and ultimate therapeutic selection and delivery.

While it may seem straightforward, there's an entire underlying philosophy to the flow that we will cover in-depth later on.

It's a very straightforward experience, and I would encourage you to download the app and give it a try for yourself, granted you live in the U.S. where Hims is currently exclusively available. Again, we will explore this chart in greater depth later on.

Hims & Hers Health In Bullets (Thesis Summarized)

• Hims is best understood as an AI-orchestrated general physician at national, and soon international, scale. In the same way your in-person general physician collects information and data from you, then prescribes you the best drugs, therapeutics, and protocols of modern times, Hims too collects data and uses AI/ML to analyze that data whereby it prescribes the best therapeutics and protocols of our modern times.
• Hims has carefully selected the most taboo and intractable health issues that require persistent, multi-year treatment as its foundational products. Because these products often must be taken for life or for multiple years consecutively, they create an attractive Customer Lifetime Value [LTV]/Customer Acquisition Cost [CAC], which is most effectively measured by the delta (difference) between gross profit margin and sales & marketing as a percent of revenue. These two metrics represent the value [LTV] of each customer and the outlay of capital required to capture that customer and net the cash flows it produces over time in the form of gross profit. As I mentioned, a portion of Hims' products must be taken for life, e.g., its finasteride and minoxidil products, and these "for life" subscribers become very durable books of business for Hims, producing cash flows year after year with no need for further CAC spend. We will discuss this further in the section on churn later on, parsing each metric together.
• And Hims' LTV/CAC, as measured by its gross profit margin less sales & marketing as a percent of revenue, has been expanding, and this expansion has allowed Hims to pull up on its net margins, resulting in six consecutive quarters now of free cash flow generation, just 6.5 years after the company was founded. For context, it required Shopify and many other digitally native companies well over a decade to reach this level of profitability. Later in this review, I will provide charts illustrating the idea that Hims' gross profit has been expanding relative to its sales and marketing, and this has yielded expanded profit margins.
• Hims' TAM is giant. As an example, in the U.S. alone, 80% of men and 50% of women deal with hair loss in their lifetimes, and Hims, today, has only 1.9M subscribers total, across all of its four specialties, i.e., dermatology, mental health, sexual health, and weight loss. Speaking of weight loss, in the U.S. alone, there are over 100M potential customers who struggle with their weight and who would be candidates for Hims' weight loss offerings, which include a range of products and certainly not just GLP-1s. More on GLP-1s later.
• In short, Hims is an AI-orchestrated national-scale general physician with an expanding LTV/CAC as a result of its long duration products, multi-product strategy, and growing brand recognition throughout the U.S. Each of the products on its platform has an incredible runway for growth. It's entirely conceivable that, one day, Hims has 20M patients on its platform and generates 20% free cash flow margins. We will explore this statement in greater depth throughout this note.

Overview Of Hims & Hers Health's Financials

Notes

• Hims grew sales at 52%, or ~46% without GLP-1's impacts. This represents genuine hypergrowth for a company of Hims' scale, but it makes sense that it would grow this fast in light of its multi-product platform strategy, long duration prescriptions, and the runway for growth that lies ahead of it.
• Hims generated its highest free cash flow margin ever; though, to be sure, some of this was aided by net working capital changes that benefited cash flows (specifically an increase in accounts payable in which this short term debt cause cash flows in the period to rise).
• Hims grew subscribers to 1.9M, representing an increase of 43% year over year, and virtually all of these subscribers were not GLP-1 subscribers, illustrating that the broad spectrum of Hims products continue to grow in massive TAMs. Importantly, Hims maintained hypergrowth without GLP-1s' assistance, contrary to prevailing market narratives these days.

With this brief introduction as our foundation, let's now turn to a more comprehensive review of the business. Here's an outline for what we will cover today:

1. The founding story of Hims, and who is Andrew Dudum?
2. How Hims fits within LAS' four foundational investment frameworks. Why do I like the company?
3. What are Hims' economic moats?
4. What are Hims' personalized solutions?
5. Hims and AI
6. Addressing Churn
7. Valuation
8. The big bad, annoying GLP-1 situation
9. Concluding thoughts

The Founding Story Of Hims & Hers Health

Like Tesla's Elon Musk, Andrew Dudum is a University of Pennsylvania graduate. For those unfamiliar with U.S. colleges, UPenn is an Ivy League school and one of the best in the country. Its business school is considered one of the best on earth.

It's notable that Mr. Dudum gained admission to this college because it requires either an incredible work ethic or a very high IQ and usually some combination of the two.

After his time at UPenn, he moved to the other side of the U.S. to work in a startup incubator, Atomic Studios, which is a venture capital startup accelerator/incubator akin to YCombinator. There he spent time helping individuals find product market fit for their startup ideas while also investing in these startups.

Circa 2017, the idea of digital healthcare, or telemedicine, emerged, and Mr. Dudum alongside a few other co-founders decided to break from their startup studio and launch their very own startup: Hims & Hers Health.

Hims was launched in November of 2017, and it started by only offering ED and hair loss medications via its male brand, Hims.

Over time, Hims grew and evolved its offering, expanding into new product categories such as mental health. In 2021, Hims launched its female brand as essentially a standalone company, Hers.

Hers has grown into a giant platform with its own app, website, and social media presence, and it serves women of all ages in, like Hims, taboo product categories such as mental and sexual health, but also, today, hair loss and weight loss.

To conclude this very brief history, Hims' board of directors has materially evolved over the years.

Today, it is stacked.

For example, the former CFO of Netflix, David Wells, joined the board in 2020, buying a few million dollars worth of Hims upon joining.

The former CEO of Tinder is also a board member.

And, recently, Hims added the former COO and President of Novo Nordisk, Kare Schultz, to its board to help it navigate the shifting landscape of the clinical weight loss industry. Novo Nordisk is the pharma giant that produces WeGovy, and Hims currently offers its generic version, Semaglutide, to its customers.

Now that we have a basic understanding of what Hims does and who runs the company, let's now consider the nature of the business through the lens of LAS' four foundational investment frameworks.

Understanding Why Hims Is An Attractive Investment

As we all know well, every business carries a certain level of risk, e.g., Microsoft is far less risky than Hims; therefore, Microsoft should offer far lower returns than what Hims offers, and I do believe this is the case today for the two companies. We will review Hims' prospective returns later on in the valuation section of this note.

Risk = return, and, without risk, there would be no return attached to our investments.

That said, there are certain near universally applicable themes, or frameworks, that apply to virtually every successful investment of the last 100 years of capitalism, and understanding our companies through these frameworks can help us sift the good companies, whose risk = return, from the bad companies, whose risk just equals risk without the returns.

LAS' four foundational investment frameworks represent these themes in which virtually all great companies fit, and looking at prospective investments through the lens of these frameworks can help us better understand why a given company is attractive and whether we should bother with it at all.

LAS' four foundational investment frameworks are:

1. Companies that vertically integrate their offerings
2. Companies that are poised to buy back shares consistently or have demonstrated a tendency to do so
3. Companies that operate multi-product businesses, and more desirably, multi-product platforms
4. Companies that can efficaciously acquire, i.e., competently allocate capital, such that their acquisitions result in the growth of free cash flow per share and the increased durability thereof.

As of today, even just 6.5 years since Hims' founding, the company fits within all four categories. This is actually incredible, as most companies require a decade+ before they find themselves as vertically integrated multi-product platforms buying back shares and making quality acquisitions.

I believe that this illustrates that Hims is poised to be a successful company for many years to come, and, by extension, a successful investment for many years to come.

Let's explore Hims through the lens of each category to better understand the nature of the business, and why I'm more excited about the company than ever.

Hims As A Vertically Integrated Multi-Product Platform

One of the most effective setups in investing is to buy a business that vertically integrates large portions of the value chain of the industry in which it competes.

New entrants often enter markets in which there's lots of competition and the products within those markets underwhelm their consumers.

By vertically integrating large swaths of the value chain underlying those underwhelming products, new entrants can create differentiated user experiences with likewise differentiated economics, with which these new entrants rapidly capture market share.

Walmart, Tesla, Amazon, and Uber all vertically integrated large portions of their respective industries, e.g., supply chains, payments technology, driver routing, logistics & warehousing, battery design and manufacturing, website/app design, and more, and this resulted in a more attractive value proposition for their consumers.

On the podcast episode that corresponds to this note, we will discuss these examples, but for the sake of brevity, I won't delve into each today.

Whatever your beliefs are about these companies, we cannot argue with the fact that they've reached unimaginably large scale in relatively short periods of time, and this has been entirely attributable to vertical integration of the value chains within their respective industries, which served to create differentiated consumer experiences and differentiated unit economics, which made it hard for incumbents to compete (This is The Innovator's Dilemma's main point).

In the case of Hims, it has vertically integrated large portions of the general physician industry, which is highly competed, fragmented, and full of point solutions in its market, such as CRM's for client bookings, CRM's for prescription drug relationships, outsourced pharmacies, in-person meeting requirements or outsourced telemedicine tech, and more.

Hims has vertically integrated these elements of the general physician industry into one seamless value proposition for consumers:

1. The front door of its practice in the form of a website and app. Hims is built on a single source of code. It controls the technology, which is clean and cloud-native. There's little tech debt here, especially relative to incumbents. All of the technological infrastructure that connects providers, pharmacies, patients, and proprietary data sets are built on this single source of code, which creates the most optimal customer experience and efficiencies that boost unit economics and reduce prices for customers.
2. The intelligence behind that front door. Hims has combined AI with human providers to create far better clinical outcomes for its patients.
3. Pharmaceutical fulfillments. By the end of 2024, Hims will operate both a 503A and 503B pharmacy, giving it total control of its unique, personalized therapeutics.
4. All client relationships and interactions are managed seamlessly through its app.

The entire general physician value chain is packaged neatly into two apps: Hims for men and Hers for women, and this has resulted in differentiated consumer experiences and correspondingly differentiated unit economics, resulting in rapid market share capture.

Hims Meteoric Subscriber Growth

Hims Has Been Capturing Market Share

These ideas provide context for why Mr. Dudum would go out of his way to highlight things like:

"Investment in Our Infrastructure Allows Us to Scale Capabilities and Capacity Across Each Specialty

Our goal is to create a platform capable of serving tens of millions of individuals while maintaining the exceptional customer experience the Hims & Hers brand has become known for. Our ongoing investments in our underlying infrastructure allow us to provide access to these solutions at scale, and the increasing demand we see each quarter highlights the critical importance of these initiatives.

[Like Walmart, vertical integration of infrastructure allowed for expanded service nationally at more attractive price points.]

With our expansion into compounded sterile medications, we recently signed an agreement to acquire a 503B outsourcing facility, which will help us serve the strong customer demand we are seeing in Weight Loss, and also position us to address new categories in the future. This is a natural expansion of our existing capabilities from our affiliated pharmacies and represents our first step to verticalizing this piece of the supply chain.

[Vertical integration of pharmacies creates greater logistics efficiency, greater ability to customize products, and lower costs of production, which can then be passed onto consumers, further locking them into the ecosystem while also expanding the number of consumers Hims serves over time.]

We anticipate this will significantly expand the level of customization and breadth of offerings we can provide our customers, while also positioning us to recognize meaningful efficiencies over time. Executing on this type of integration is a core competency of our teams allowing us to drive further accessibility for a broadening selection of solutions and to continue to pass value back to our customers.

This investment also complements our ongoing efforts to enhance the scope and capabilities of our existing infrastructure by incorporating robotics and specialized software which will enable much of the upcoming innovation on the platform. As we have noted previously, we expect these investments will continue over the next three years. The foundation of our approach continues to center on providing a spectrum of solutions that our providers can leverage to best meet each individual’s needs."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

On Hims Q2'24 call, Mr. Dudum shared the following on the value of purchasing and vertically integrating a 503B pharmacy.

"We're excited to have recently signed an agreement to purchase an FDA registered 503B facility.

Over the long term, this acquisition will present additional opportunities across specialties such as hormonal therapy and other treatments that require sterile compounded medications. In the near term, this further enhances the durability of our supply chain for compounded GLP-1s and positions us to improve accessibility as we vertically integrate these operations.

Prior to signing this acquisition, we expanded the capabilities of our weight loss specialty with the launch of compounded GLP-1s across 21 states in the 2nd quarter through a partnership with an FDA registered 503B facility. Since then, we have expanded access to the offering to more than 30 states, covering over 60% of the U.S. population, and we anticipate nationwide availability before year end."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

A Multi-Product Platform

Atop this differentiated and vertically integrated platform, Hims also, in accordance with our third foundational investment framework, has built out a robust multi-product platform, adding new products and brands to the platform consistently since its founding.

As I mentioned earlier, Hims started as just its male Hims brand, with only hair loss and erectile dysfunction medications on its platform; subsequently, it evolved into a multi-product platform offering two distinct brands: one for men and one for women, i.e., Hers.

Hims Product Roadmap (Note That It's 2x For Women & Men)

Hims & Hers Health Q1'24 Earnings Presentation

And, as we know, there are material benefits to becoming a multi-product platform, such as more durable growth and a longer runway for growth, more avenues to go to market resulting in more efficient CAC spend, and more (I will discuss them on the podcast because adding them would make this too lengthy. This is the Seven points of multi-product value I cited often).

"Our execution to date is instilling greater confidence in our ability to either meet or exceed this ambitious goal. We expect the recent launch of access to GLP-1 injections on our platform to be incremental to that already remarkable trajectory. Similar to other past innovations in our portfolio, this addition helped drive an acceleration on the top-line, with year-over-year consolidated revenue growth accelerating 6 points relative to the first quarter to 52%.

The strength of our existing offerings was also on full display, with revenue north of $300 million in the quarter excluding contributions from the GLP-1 launch, growing more than 46% year-over-year."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

Hims' expansion into various personalized products, essentially going multi-product within one product category, so to speak, has also resulted in multi-product value; specifically, expanded avenues to go to market resulting in greater customer acquisition,

"As a result, more than 85% of new subscribers in our dermatology specialties were utilizing a personalized solution in the second quarter. The impact of personalization extends beyond simply consumer preference.

By addressing the needs of different user profiles, we are able to remove barriers to treatment for a broader set of individuals, ultimately yielding stronger customer acquisition.

Additionally, we expect stronger retention of consumers on these offerings especially as they continue to be placed at more mass market price points."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

Concretely, becoming a multi-product platform should reveal itself in the expansion of LTV/CAC, and, as we know, LTV/CAC, for Hims, can be roughly measured by analyzing the delta between gross profit margin and sales & marketing as a percent of revenue, as well as the delta between gross profit nominally and sales & marketing expense nominally.

To this end, Hims' S&M as a percent of revenue hit its lowest level in its public company history in Q2'24 while its gross profit margins hovered at all time highs, which is exactly what we'd expect for a company reaching its most multi-product version of itself ever.

"Marketing as a percentage of revenue improved nearly 6 points year-over-year to 46%, marking the lowest point in our history as a public company, a shifting mix toward personalized solutions combined with the seasoning of newer cohorts on favorable pricing is yielding stronger retention."

Yemi Okupe, CFO, Q2'24 Hims & Hers Health Earnings Call

Capital Allocation

In addition to the first and third foundational investment frameworks, Hims also has demonstrated the second and fourth via its decision to begin buying back shares and its decision to acquire Apostrophe whose 503A compounding pharmacy has been the backbone of Hims' personalized offerings over the last few years.

As I mentioned earlier, it's very rare for a company younger than, really, 20 years old to fit within all four categories, so there's not too much to discuss in this section, though it's worth noting that Hims has prudently managed the giant cash hoard it has on its balance sheet, which sits alongside no debt.

Let's now turn to a consideration of the economic moats of Hims.

The Economic Moats Of Hims & Hers Health

"Our brand continues to build trust, and we believe is increasingly becoming known for providing access to high-quality and innovative personalized solutions at affordable prices. This is resulting in two benefits. The first is the continued robust growth across our longest tenured specialties. The second is a meaningful acceleration in our ability to scale newer specialties."

[Less CAC, more LTV! = Bigger LTV/CAC = More value to shareholders = growth of the value of Hims]

"Since launching the business in 2017, we have typically seen new specialties approach 100,000 subscribers within 18-24 months. In Weight Loss, we have eclipsed this mark in just over seven months, a remarkable start that we believe underlines both our improving ability to ramp new specialties, and the tremendous need for these solutions."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

The four primary moats are:

1. Brand
2. Network Effects
3. Economies of scale
4. Embedding/switching costs

While Hims does benefit from some degree of network effects, in that, because it is the most well-known brand with the largest user base, it will attract the best medical professionals, and because it has the best medical professionals, it will attract more customers, and so on and so forth, I do not believe network effects is a very strong moat for Hims today.

Economies of scale are important through the lens of CAC spend, in that Hims can more efficiently acquire customers due to its multi-product platform and scale. If one customer channel isn't working as well, it can pivot and deploy dollars elsewhere, efficiently growing and giving its customers across its categories the best experience and price possible.

For its single product peers, they do not have this luxury and may be forced to raise prices or reduce marketing spend as one channel weakens temporarily.

Hims Has Rapidly Taken Share From Its Single Product & Subscale Competitors

Hims' two most significant competitive advantages are its brand and embedding moats.

As I mentioned earlier, as one example, finasteride and minoxidil are medications that their users must take for life, or for at least as long as they want to keep their hair.

This creates a potent embedding moat.

Moreover, these medications do not always work, and customers want to buy from a provider that can guarantee the quality of their medications.

Hims' brand as a trusted source for these medications has grown over the years.

Personalized Solutions

Using the finasteride and minoxidil example, Hims offers customized solutions such that it combines fin/min/biotin/vitamin C into one chewable tablet that it offers its customers.

"Continued innovation across personalized offerings is driving strong and, in some cases, even accelerating growth across our longer tenured specialties. These solutions are able to address unique consumer needs, including the ability to target multiple conditions with one solution, balance side effects and efficacy through unique dosing, and support adherence with a variety of form factors. Signs continue to point to higher retention when we unlock value across these dimensions for consumers."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

A combination pill like fin/min is very desirable, and, again, it is something that must be taken for life, or until a person no longer cares about their hair falling out.

In the weight loss category, I believe personalized solutions will be particularly compelling, and they should act as the path through which Hims sells GLP-1s during the period in which there's no shortage and NVO's and LLY's patents still prevent sale of compounding solutions.

Hims leverages AI to create personalized weight loss programs. CEO Dudum shared on the following on this subject:

"The second component is continuing to scale our technology investments across weight loss by activating MedMatch by Hims & Hers for providers in this specialty. ML and AI models anchored on consumer preferences and prior experiences across our provider network have been built for weight loss. We are also moving toward integrating explainability into the EMR, further empowering providers with these groundbreaking tools.

The value of this technology will be vital as the range of solutions, dosages and treatment options continue to expand over the coming quarters. With scale, we expect these models will continue to improve, helping providers to optimize initial medication selection, titration schedules, and end state dosing to help each user reach their desired outcome. By leveraging this approach, we are providing a weight loss program that can continuously improve over time."

"Having said that, we have already started reporting that, based upon self-reported data from approximately 12,000 customers subscribed a holistic Hims & Hers weight loss offering, customers report having lost on average 10.2 pounds while on compounded GLP-1 injections and 6.3 pounds, while on compounded oral medication kits between their initial weight loss consultation and their first check in approximately four weeks later."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

In a traditional clinical setting, a physician cannot be with the patient at all times.

But, with Hims, patients will have 24/7 access to either their provider or an LLM fine-tuned to Hims' proprietary data set, and this AI will interact with patients.

"During the same period, less than 10% of customers using our compounded GLP-1 offering have reported side effects that they feel they can't tolerate. This progress underlines the importance of a holistic approach as each of our subscribers have access to personalized treatment plans based on lifestyle, eating pattern, health history and weight loss goals, and includes medications in addition to diet, exercise and weight loss counseling and support.

We believe these figures are just the starting point for what we can help our customers achieve. By continuing to invest strategically in our technological infrastructure and further refining our approach, we believe we can deliver access to better outcomes than any other in-person or a digital provider over the long term."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

Speaking of AI...

The Future Of Hims & Hers Health: AI

Mr. Dudum described the challenges that weight loss patients face today in sharing,

"Lack of information: It is difficult for many consumers to understand what solutions are available to meet their needs, which makes it even more challenging to understand the solution that is right for them."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

In an AI future, Hims will use Meta's 1T model and fine tune it to its proprietary set of data, accumulated via tens of millions of patient interactions.

This proprietary set of data used to fine-tune a 1T model represents a substantial competitive advantage for Hims, and it could certainly become a first-mover scenario in the years ahead, as Hims races to field the first true AI-general physician at national and, over time, international scale, trained on its unique set of data.

"We expect the implementation of MedMatch by Hims & Hers can evolve over time to help providers identify treatments that consumers are more likely to adhere to within this specialty. Machine learning models can help providers understand the type of medication, the appropriate titration schedule, and the correct personalized end-dose, in each case that is more likely to lead to consumer success. The models will initially be anchored on consumer preferences, prior experiences across our provider network, and publicly available inputs. Over time, we believe these models will rapidly evolve and improve as the consumer base scales."

Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

"Our platform has rapidly scaled from thousands of interactions to millions and with greater personalized capabilities comes the ability to leverage as appropriate, our structured data to further refine and improve our customers' experience on the platform. We recently kicked-off our search for a CTO with expertise in AI and machine learning. We believe this hire will help put us at the forefront of the many exciting opportunities AI can bring in health care. Strong progress across these areas are translating into incredible business performance."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

In the future, Hims patients will simply open their app and instantly communicate with an AI that uniquely represents the views and proprietary data that Hims used to train the AI.

It will be as if ten million physicians work for Hims 24/7/365, sharing the company's stated clinical philosophies, guiding patients to their desired outcomes.

This will certainly be an element of the Hims thesis to monitor.

Addressing Churn & The Economics Of The Hims Business

Hims is a fascinating business when considered through the lens of churn. To give you a template for Hims' business model, I would invite you to think about Netflix's business model, and the CFO of Netflix joining Hims' board substantiates this likening. We will discuss this likening on the associated podcast episodes.

I can remember Hims' earliest earnings calls as a public company in which churn was the great fear that was constantly asked about. For those listening to its current earnings calls, you'll know that GLP-1s are the great fear, or great uncertainty, on everyone's mind.

Churn was once a point of uncertainty on its earnings calls to this degree as well.

Thinking about it philosophically, Hims is not like a direct-to-consumer shoe brand. It's not like a SaaS business either. It's close to Netflix, but also not perfectly like Netflix either.

Instead, it's somewhere in between. It's its own unique business model, which I believe is why its share price has been so incredibly volatile.

As we know, Hims is a general physician at national scale. General physicians have a mix of business: In some cases, they have subscription-like customers. In many cases, they have one-time customers who may not return for years at a time.

And, yet, general physicians generate very healthy incomes.

In some sense, as we already covered, Hims is acting as the Walmart of general physicians, vacuuming up the "mom and pop" GPs in the same way Walmart vacuumed up the demand of mom and pop grocers.

So Hims will not have a business model that can be measured by SaaS metrics. General physicians do not, so it makes no sense to look at Hims as a SaaS business.

And Hims also will not have a business model like a shoe brand that sells direct to consumer because it, like we've covered, offers "for life" products, such as finasteride and minoxidil combo pills and chewables.

So, if Hims is not SaaS, the performance of which can be measured via key performance indicators like Net Retention Rate and Gross Retention Rate, then how can we measure the performance of Hims?

We can do so by assessing the delta between gross profit margin and sales & marketing as a percent of revenue, as well as gross profit nominally vs sales and marketing nominally.

Hims Gross Profit Margin & Sales And Marketing As A Percent Of Revenue

Because we do not have any real retention metrics, though we do know there are layers of Hims' business that use its products for life and generate, as a result, "for life" cash flows, the difference between these two metrics is our north star.

It represents the expansion of the company's value through the metric LTV/CAC. As the lifetime value of Hims' customers grows, as measured by gross profits, the capital spent to create those customers declines, relatively speaking, resulting in growing cash flows.

So long as this trend persists, the business is getting healthier. It’s retaining a sufficient number of customers to grow gross profits without ever increasing marketing spend.

We can see this very clearly in the gross profit and sales & marketing expense chart below.

Hims Gross Profit Vs Sales & Marketing Expense, TTM

As we can see, gross profit has grown much faster than sales and marketing. This is the result of the long tenured customers sticking with the platform, atop of which Hims continues to layer on new long tenured customers as well as the natural one-time customers a general physician will experience.

It is also the result of Hims becoming a multi-product platform that can effectively upsell its customers on new products, increasing their LTV over time.

And it's also a result of increasing brand awareness such that customers just know Hims is a safe and reliable source for medical interventions.

In short, gross profit represents Hims' growing book of business, and its expansion relative to sales and marketing represents a durable legacy book of business.

Hims' Free Cash Flow Margin Expands As The Delta Between Gross Profit & Sales & Marketing Expense Expands

As Hims captures more and more "forever" or "multi-year" customers, its pool of gross profits becomes more durable.

It then layers on new forever customers, growing that gross profit with each passing year.

It does not need to continue to spend on CAC (sales and marketing) to capture the cash flows (gross profits) of these customers; the cash flows from these customers simply fall to the bottom line in the form of free cash flow per share, and this is what we've seen thus far.

This results in expanding profit margins and growing free cash flow per share.

Hims Free Cash Flow Per Share Vs Price

Valuation

As we know, there are four points of equity value:

1. Free cash flow per share (The Economic Characteristics of a Business, such as long term margins and dilution needed to execute the business.)
2. The growth thereof (For instance, Hims has ~100K weight loss subscribers. 100M citizens in the U.S. alone struggle with their weight, so we know there's ample runway for growth here.)
3. The durability thereof (Hims offers products that people can't live without, lest they lose their hair or lose their sex lives. It also offers "for life" products, such as fin/min.)
4. Our next best alternative (Hims generates free cash flow today, which is important in assessing the company through the lens of the time value of money.)

"For fiscal year 2024, we now expect to achieve $1.37-$1.40 billion in revenue and $140-$155 million in Adjusted EBITDA. We also continue to anticipate that 2024 will mark our first full year of net income profitability as a company. This building momentum and the investments we are making alongside it further our conviction that we are on a clear path to achieve our long-term Adjusted EBITDA margin target of at least 20% before 2030."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

Importantly, a valuation for Hims depends on its long run margins.

As I often discuss, a growth company's valuation cannot be understood without assumptions about long term margins.

And, in the case of Hims, it has guided to "at least 20% adjusted EBITDA margins."

As we also know, free cash flow per share is the basis of all equity value, so adjusted EBITDA must be converted into free cash flow per share, and, to do this, we must deduct the I, T, and D&A from EBITDA to arrive at free cash flow.

Hims Grows Net Income To $13.3M, Representing A 4.2% Margin

Hims Grows Adjusted EBITDA To 12.5%, Representing A 12.5% Margin

Hims' Free Cash Flow Margin Hit 15% In Q2'24

Hims' Margin Guidance

With all of these ideas in mind, let's perform our valuation exercise.

Assumptions:

And here are the results:

Notably, I assumed 25% dilution over the next 10 years. I believe this is reasonable, though there's perhaps some chance it comes in higher. We will have to monitor it in the years ahead.

Turning to projected returns:

Notably, I used a 3.33% FCF yield, i.e., an exit multiple of 30x, and I believe this is fair in light of the fact that Hims offers a product that consumers generally will not abandon, lest their hair fall out or their sex life deteriorate.

Concluding Thoughts: GLP-1s Have Been A Net Negative Thus Far

At this point, I believe GLP-1s have been a net negative for Hims stock.

Investors will likely continue to avoid the stock until it is simply too unimaginably cheap, as was the case in October of 2023, or until the GLP-1 situation is resolved.

Presently, there's just not perfect clarity as to whether Hims will offer GLP-1s, and the next pronouncement from Novo (semaglutide) could send the stock careening downward, irrespective of whether that would be rational.

Moreover, I believe that GLP-1s have overshadowed the almost unbelievable success of Hims' non-GLP-1 weight loss business, which has been its fastest growing category ever.

"In the 4th quarter of last year, we launched our weight loss specialty with personalized oral-based solutions. This offering utilizes different combinations of personalized compounds to address the underlying conditions clinically tied to obesity, including metabolic disorders, depression and overeating habits. It has been incredibly successful. Within less than a year, it has scaled to a run rate of $100 million in annual revenue, becoming our fastest specialty ever to do so."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

Importantly, GLP-1s are prohibitively expensive, and tens of millions of U.S. citizens will have no access to affordable generic brands, like semaglutide, which Hims offers today, once the shortages officially end.

To this end, Hims' weight loss business will continue to thrive with or without GLP-1s.

"Over 100 million individuals suffer with weight-related challenges in the U.S. alone, and those challenges don't simply impact an individual's appearance. These challenges can also erode confidence and lead to serious health-related conditions, including cardiovascular disease, diabetes and cancer. Given the impact of obesity can have on an individual and the severity of conditions it can lead to, we expect weight loss as a specialty to be foundational over the coming decade in the way Hims & Hers impacts the lives of our consumers in the way we influence the health care industry."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

"Our historical time frame for a new category to reach meaningful scale has been 1.5 to two years. In the fourth quarter of last year, we launched our weight loss specialty with a personalized set of oral-based treatments designed to address the underlying root cause of an individual's weight gain. Almost 100,000 consumers have subscribed to our weight loss offering in just over seven months since launch. In the middle of the second quarter, we expanded this offering with the launch of compounded GLP-1 injections on the platform."

-Yemi Okupe, CFO, Q2'24 Hims & Hers Health Earnings Call

While GLP-1s create uncertainty today, over time, Hims' weight loss book of business will be a combination of its non-GLP-1 products and GLP-1s. It will be easy, smooth sailing from there.

"Our oral Weight Loss solutions – which currently utilize 10 different combinations of personalized compounds to treat a range of metabolic conditions associated with obesity – are off to a remarkably strong start. This offering alone reached a run-rate of $100 million in annual revenue in the second quarter. We expect these solutions will continue to be an instrumental part of our Weight Loss offering alongside GLP-1s. We believe continued evolution of our oral offerings, as well as our GLP-1 offering, will enable us to help many of the 100 million individuals across the country suffering from weight challenges feel great through the power of better health."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

All that said, Mr. Dudum believes that GLP-1s will continue to be sold on the platform even once all shortages end.

"We also believe that enabling providers to access a broader set of solutions will make MedMatch by Hims & Hers even more impactful. In the coming months we are excited to roll out a broader set of personalized dosages across our Weight Loss offering to address the clinical needs of the patients on our platform, as well as a set of customized titration schedules. Additionally, we expect to broaden the types of GLP-1 solutions we provide access to on the platform, with the inclusion of products such as Tirzepatide and Liraglutide in the near future."

-Andrew Dudum, CEO, Hims & Hers Health Q2'24 Shareholder Letter

On Hims' Q2'24 earnings call, Mr. Dudum shared the following logic underpinning his stance that Hims will continue to offer GLP-1s in a post-shortage world.

This is highly controversial, but here's his logic for this stance:

In essence, his reasoning was that personalized GLP-1 offerings have legal precedent and are acceptable in instances where a patient cannot tolerate the name brand product and its protocol.

"Jack Wallace: Just wanted to follow up to that last question and maybe ask the personalization element in a different way. Is there an existing product in the market or existing form factor, is that enough to be personalized or is it through a personalized dosing regimen, personalized enough to operate under a personalization exemption after the drugs are off the shortage list or do they need to be further personalization enhancements to make that possible?

Andrew Dudum: The short answer is that the compounded exemption, it's relatively clear, and there's been decades of established precedent with regard to what qualifies as personalized. And this often is a form factor, as you outlined or it could be dosing dynamics if a patient is not getting the outcome that they're hoping for, or they are experiencing side effects that are intolerable.

So these types of customizations are relatively well established and I think the clinical necessity of compounding and the clinical necessity of personalizing medication is really well established, right? This is not overwhelmingly the case. But in many ways, you personalize dosages to augment what is commercially available. And so I think our personalization dosages that exist on the platform today are offering fantastic high touch care to patients that otherwise really wouldn't be able to experience the benefits of GLP-1. And I would expect in the future in a post shortage world, this also continues to exist for patients as an access point."

-Hims & Hers Health Q2'24 Earnings Call

The last notable quote from the call was, on the subject of the weight loss business long term:

"But I think there's also probably going to be five or 10 new medications that come to market in the next few years, just given if you look at the clinical studies and the FDA pipeline. So I think you're looking at five to 10 years of innovation, all kind of expanding off of the initial GLP-1 learning and that first medication out there with liraglutide now coming off patent."

So I think what you can expect is some fluidity without question, where I think we get a lot of confidence is that there's a really broad set of offerings under the hood that we believe in combination results in a really durable business line. As we talked about, the oral compounds that we have launched, that is -- that in and about itself is the fastest growing specialty we've ever launched on the platform, achieving north of $100 million run rate just in six or seven months. We expect huge evolutions in that platform and expansion of offerings there that patients really do love and are having great outcomes.

...

This is an exemption for which we operate the entire business under and have for the last six or seven years.

And there's really an established precedent where everybody in market really respects the clinical need of personalization and realizes that often these personalized dosages augment what is commercially available and are not directly cannibalizing large pharma. So when you think about very few, if any, examples, where large pharma comes after legitimate clinically necessary compounding and what we're seeing on our platform is that for these medications, that clinical customization is definitely needed for some patients. And we believe in combination with the rest of the portfolio, that will be included and available to patients over a long period of time."

-Andrew Dudum, CEO, Q2'24 Hims & Hers Health Earnings Call

To summarize my thinking on the subject, here's what I would say:

1. Hims can offer branded NVO/LLY should shortages totally end. It is, after all, just a national-scale AI-orchestrated general physician.
2. If the tens of millions of consumers who cannot afford branded GLP-1s don't want those branded offerings, they will use Hims' legacy weight loss products that have scaled to $100M in 6-7 months (its fastest new product growth ever).
3. Hims will also try to offer customized GLP-1 compounds via its soon-to-be purchased 503B pharmacy. It's just a matter of timing here. It will offer these, but when isn't perfectly obvious.
4. Over time, Hims will invariably offer GLP-1s of all kinds, including its own compounded formulas.
5. FDA has a robust pipeline of new weight loss drugs set to come to market in the years ahead, adding to Hims' portfolio over time (Hims will generally add new drugs to the platform over time as well).

However you slice it, the thesis very much remains intact. Better than ever, with or without the shortage.

Thank you for reading, and please feel free to follow up with questions on X or in the Hims House community (both linked in the footer below).