Is Hims & Hers Health a Good Way To Play the Telehealth Megatrend?

On Jan. 20th, Hims & Hers Health (NYSE:HIMS) announced that it will begin trading on the New York Stock Exchange as HIMS stock. How? Well, the company did this by using a Special Purpose Acquisition Company (SPAC). That is, there was a merger into the shell company Oaktree Acquisition Corp.

During the first week of trading, HIMS stock was choppy. However, shares has since been on a nice rally — going from $15.68 to above $22.

Additionally, with the SPAC, HIMS was able to raise $280 million. About $75 million came from a private placement from investors like Oaktree clients and Franklin Resources (NYSE:BEN). And before this, the company had raised $158 million in venture capital.

As a whole, HIMS operates a telehealth platform as well as a digital pharmacy. The company is also working on a 300,000 square foot distribution center. Overall, though, the market value of the firm is currently about $4.26 billion.

So, what now for HIMS stock? Is it a good bet for this year?

Well, let’s dive in and take a closer look.

Background on the Company

Collectively, HIMS is a fairly new company. Back in late 2017, Andrew Dudum and Jack Abraham started the operation. They did this through their own venture capital firm, Atomic.

In the first week, HIMS generated $1 million in sales — and would finish the year at $27 million. No doubt, the company nailed the proverbial product-market fit.

At first, the focus was on providing telehealth services, such as for erectile dysfunction and hair loss. But HIMS would quickly expand its platform. And in 2018, there was the launch of Hers.

That said, there was also moves into categories like mental health, dermatology and primary care. To help with the management of the growing organization, HIMS created its own EHR (Electronic Health Record) system.

Moreover, the company’s service is primarily focused on Millennials and the Generation Z cohorts, who do not have insurance. The business model involves a subscription that is about $20 to $30 per month. Yet, the main revenues come from the sales of prescriptions.

Now, HIMS is not completely virtual. The company has partnered with a variety of health care operators — such as Ochsner Health, Mount Sinai Health System, and Privia Health — to provide access to in-person visits with doctors.

And yes, the market opportunity is truly massive. The spending on prescription drugs comes to about $600 billion a year — and as for primary care, its about $280 billion (according to Deloitte and Grand View Research).

However, there are some nagging issues with HIMS stock. First of all, by relying on the sale of drugs, this could mean more pressure to make prescriptions, even if they are not needed. Next, there are the competitive pressures. There are a variety of startups gunning for the telehealth opportunity. But mega tech companies like Amazon (NASDAQ:AMZN) and traditional players like CVS (NYSE:CVS) could be major factors as well.

And finally, the valuation on HIMS stock is on the high side. Consider that the price-sales (P/S) ratio is about 30 times.

Bottom Line on HIMS stock

The growth story at HIMS has been standout. For 2020, the sales are expected to have increased by 66% to $138 million. And as for this year, the forecast is for $179 million and $233 million for 2022.

The company is also realizing economies of scale. For example, the gross margins have climbed to 71%.

Of course, with the novel coronavirus pandemic, the telehealth market has quickly gone mainstream. Healthcare providers are comfortable with the approach and insurance providers see this as an efficient option. As a result, the public companies in the sector have posted robust gains, such as Teladoc Health (NYSE:TDOC) and American Well (NYSE:AMWL).

And as for HIMS stock, it offers investors an interesting twist on the opportunity because of the focus on younger generations, which are likely to be more inclined to use digital services. Thus, when it comes for ways to capitalize on the telehealth megatrend, this one looks like a good choice.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL.