Shares of Hims & Hers Health Inc. (NYSE: HIMS) are jumping by as much as 15.5% after the company released its first quarter 2024 earnings results. This quarter is arguably the most important quarter as it sets the tone for the rest of the year in any stock. In the case of Hims & Hers stock, investors have additional evidence to justify a potential investment in the name.
As the United States economy experiences a pivotal year, 2024 will require investors to add more stable names to their portfolios without sacrificing above-average earnings per share (EPS) growth. The healthcare sector isn’t known for its development, typically in single-digit ranges. However, it does provide stability to portfolios.
On the other hand, the technology sector carries higher volatility since it is composed of high-beta stocks. The trade-off comes through the sector’s attractive EPS growth rates, which typically stay in the double-digit realm. Hims & Hers stock gives investors the best of both worlds: healthcare stability and technology growth.
It’s All About Growth
Over the past three years, the company has grown its user base to over 1.7 million, and statistics suggest it still has a long way to go. In the U.S., the telehealth market (where this company operates) was estimated to be as big as $29.6 billion in 2022 and is expected to grow at a compounded average growth rate (CAGR) of 22.9% until 2030.
Attempting to take a chunk of this growth, Hims & Hers is giving Wall Street more reasons to keep betting on this future potential being more of a reality. Wall Street analysts expect the stock to deliver EPS growth of 127.3% this year.
These growth rates stand over the medical information systems industry average of 36.9%. Beating competitors like Teladoc Health Inc. (NYSE: TDOC) and its 33% EPS growth projections, Hims & Hers commands a premium valuation over the industry, and for good reason.
Compared to the medical doctor's clinics industry, which trades at a price-to-sales (P/S) ratio of 1.2x, the Hims & Hers stock today calls for a 146% premium through its 2.9x P/S multiple.
Typically, stocks trade at premium valuations for good reason, and this becomes especially attractive when investors compare the stock’s valuation to its price action.
Hims & her stock trades at only 68% of its 52-week high, even accounting for the post-earnings rally. Speaking of earnings, markets could be twice as excited about the stock going forward.
A Stellar Start to The Year
The company leads its quarterly results press release with 46% annual revenue growth and a 41% advance in yearly subscribers.
Investors may notice the company’s efforts to spread the brand’s value through social media, as $130.5 million in marketing expenses (47% of revenue) secured a spot on platforms like Instagram and YouTube. Being a $2.5 billion market capitalization company requires spending these high amounts on marketing, but here’s where Hims & Hers stands out.
Most companies in this stage cannot report a net positive free cash flow (operating cash flow minus capital expenditures); Hims & Hers shows roughly $15 million in free cash flow, of which $28 million was used to repurchase stock.
Buying back stock in the year's first quarter means two things for investors. First, the stock is undervalued in management's eyes; second, management could expect a continuation—and expansion—in the company's current favorable free cash flow position.
This is where value investors begin to compound their wealth, catching a value stock before it becomes significant, and enjoy the benefits of stock buybacks.
Because of this and many other reasons, analysts at Citigroup Inc. (NYSE: C) saw it fit to boost their price targets for Hims & Hers up to $16 a share. The stock would need to rally by as much as 37.3% to prove these valuations right.
Market’s Vote for Hims & Hers
Zooming into price action, investors could compare the past quarter’s price action in Hims & Hers stock against the broader Health Care Select Sector SPDR Fund (NYSEARCA: XLV) and the Technology Select Sector SPDR Fund (NYSEARCA: XLK), arguably the mix to which the stock belongs.
Over the past quarter, Hims & her stock outperformed both exchange-traded funds (ETFs) by as much as 30%. Considering that the first quarter delivered better-than-expected results, these analysts could sweep in with a boost in their valuations and EPS projections.
Now, considering that the Vanguard Group is the stock’s largest institutional owner, investors could have another leg to lean on when considering Hims & Hers’ potential as a watchlist addition.
