Chit Chat Stocks - Hims & Hers Stock Report (Ticker: HIMS)

Episode Date: January 24, 2024

On this episode of Chit Chat Money, we discuss the rapidly growing telehealth start-up Hims and Hers. We discuss and debate: - Why HIMS has grown so quickly - Do they have any emerging competitive advantages? - Thoughts on the founder, proxy statement, and management team - Whether they benefit from the innovator's dilemma - Modeling out financials through 2026 - Red flags with customer reviews - Whether Brett is buying the stock today ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatMoney/featured  Follow us on Twitter/X: https://twitter.com/chitchatmoney  Follow us on Substack: https://chitchatmoney.substack.com/  ********************************************************************* Chit Chat Money is brought to you by Public.com*. Sign up for a high-yield cash account today: ⁠https://public.com/chitchatmoney⁠ *A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at ⁠https://public.com/disclosures/high-yield-account⁠ ********************************************************************* Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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found in the podcast description. High-yield cash accounts are available for U.S. members only. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into Chit Chat Money. My name is Brett Schaefer, and I am joined, as always, by Ryan Henderson.

This is our Wednesday episode. We have switched it up from the Tuesday not-so-deep-dive theme. How long did we do that? Maybe like two years? We're doing similar type stuff now, so don't worry. I know there's a lot of people that were messaging us and stuff saying, hey, we really like those type of shows. Don't worry.

We're doing a very similar show to that today. And we are covering Hymns and Hers, ticker H-I-M-S. Yeah, I guess. Probably just going to call it Hymns. Yeah, it's, well, it's going to get confusing because it's Hymns and Hers. The ticker, though, is H-I-M-S, but sometimes we're referring specifically to the HIMS.com website, sometimes referring specifically to the HERS.com website. Either way, people are probably confused listening to this.

We're one week away from changing our name to Chit Chat Stocks, so watch out for that. The logo is going to change slightly. You probably already noticed we put our faces on there specifically for SEO purposes, just because we read a few blog posts about that. if you enjoy listenership's gone up man it has faces it's probably yeah it's because we're so beautiful right no i think it's probably because we're doing uh fewer episodes and higher quality and it's been a bit of a rambling intro but i want to say that we're covering hymns and hers today in a similar format to the not so deep dive but a little bit more flexibility and how we're doing

these is we've given ourselves individually more time to research a stock. So for the last, what day is it? January 17th, essentially the last 17 days. It was a little shorter at the start here for the first one. I was researching hims and hers. Ryan has been researching for next week, booking.com. And then we'll probably take another month and I'll pick another stock to research instead of doing something for one week. Now we're going to give each other a month and hopefully improve the quality here. Yes, the frequency is going to be lower. That's the downside. We're not going to uncover as many rocks, but we hope people get much more out of these episodes as I think I have a much more comprehensive understanding of the hymns and

hers business. But if you enjoy this podcast, as I said, give this a five-star review on Spotify and Apple. And if you like this episode specifically, click that little share button and share it with somebody you think you would like it too. That's one of the best ways to help us grow and for the show notes subscribe to the newsletter chitchat money soon to be chitchat stocks the link is in the show notes there ryan you're going to be questioner yeah question doing the questioner you're going to be uh leading i guess this discussion uh and i'll be responding to some of your questions topics all that good stuff so why don't you take it away anything else before we get started or just get right to it no it's let's get right into the business so

So it's called Hims and Hers. This might be a name that some people recognize just purely from commercials, stuff like that. So why don't you take us through it? What is the Hims and Hers business? What are they actually doing? And then can you give some history into how the business got started? Yeah, if you are somewhere close to our age and you've ever done a Google search about hair loss, which I have, you are probably having your Instagram or TikTok page overrun with their advertisement. But let's go through it. Yes. What is the business model and a brief history? Because this is really a young company. So if we look at their 10K annual report, they define their business as, quote, a consumer first platform transforming the way customers fulfill their health and wellness needs. don't know what that means, but in practice, this means HIMSS and HERS does a few things. First, they run a website and mobile application that allows doctors to offer telehealth consultations, manage electronic records for patients, make digital prescriptions, and perform pharmacy fulfillment, you know, all in the up and up for all the regulations there. HIMSS is not technically

allowed to own its own medical practice, so it has to outsource to clinical doctors that they don't they're not under their corporate umbrella but if you read the fine print it essentially says and i have the quote for the full quote for the newsletter that the affiliated medical groups that provide the consultations are basically were invented for the sole purpose of providing services to patients of hims and hers on the various platforms and they have no other operations outside of these activities so they can say that they're not affiliated but technically i mean for all intents and purposes, they work for HIMS and HERS. The customer doesn't really know the difference and doesn't really matter at that point. But to simplify things on the back end,

now this is important, and we're going to talk about this throughout the episode. HIMS does not deal with insurance at all. Of course, this restricts what HIMS can legally have its doctors prescribe. It's going to limit what they're going to be able to do because of the reimbursement stuff. Some stuff's going to be way too expensive. For example, they're not really getting into GLP-1s right now, those innovative weight loss drugs, because they're too expensive at the moment and they don't deal with insurance. So that's not something they want to do. But for the stuff that they are going after, which we'll get into, it makes it way less complicated to not deal with insurance for stuff that's very, you know, fairly cheap. Management believes, and they talk about

this all the time, that the trade-offs and not using insurance at the moment are positive for them because it allows them to have a, what they would call a frictionless operation for their customers ryan as i talked about the kind of back-end stuff there the technology they built for the telehealth platform any questions any confusion there no i think it makes sense it kind of makes it cleaner in a way that they're not going through insurance companies but obviously like you said it's gonna it's gonna restrict them most if these were very expensive drugs that they were selling it would be very difficult for most people to afford them without insurance so instead they're going after i think what a lot of you're going to talk about this here

in a second but i like that they are very direct and clear about the drugs that they offer and it's not this like they don't use like really vague random names and maybe they do but they're very clear about what the exact benefits are and and you'll you'll describe that here in a second the websites are very direct. There's no confusion needed. Yes. So let's get to what people may know hims and hers about is that that's the consumer side of things. People probably just know them for their products and they run to consumer facing marketplaces, hims and hers, one for males, one for females to connect people with these medical providers. And again, these medical providers are selling hims and hers products. They focus on sexual wellness,

hair loss, anxiety, and they are expanding. They just launched recently into weight loss products and consultations. So if we look at, I'll have this in the newsletter. I don't think I need to share this screen. The front page of the Hemsworth's website says in big letters, experience the power of better health. And there's six buttons. First one says, have great sex. Second one, regrow hair. Third one, lose weight, tackle anxiety, have longer sex get smooth skin it's very very clear and you click the button it's like it's it's like uh i don't know they streamline this operation they they want to make it as simple as possible i think it's good it's clean yeah it is clean it's a good design website well-designed

website for sure we go to hers i find it funny what is promoted on the various ones um because we look at the hers one they do focus a lot on hair regrowth there as well they focus on anxiety and depression uh weight loss birth control and like vitamins minerals skin stuff all that good stuff um if you can look at these websites go check them out it's pretty easy they're the i haven't linked in the newsletter but it's hymns.com and for hers.com they have a very modern direct to consumer style for the web layouts think of the same category what would i put them in the warby parker style the casper mattress style they all seem to be very similar um and the products themselves have this style as well where they're in this very clean looking packaging it

looks nice it's got very warm colors i don't know if that matters but it's much different than say the product you would buy from who is a brand head and shoulders maybe would have a hair loss spray and it's going to look entirely different now importantly hymns is marketing almost all of its own products whether it's like generic type stuff where they just have the hymns label on it or stuff they've made themselves with either you know the hymns or hers brand so for example They recently launched HIMS Hard Mints to help with erectile dysfunction in males. It plans to release more of these personalized products with an aim to differentiate itself from just a provider of generic over-the-counter drugs.

And then a customer journey, you kind of think about how someone becomes a customer of HIMS or HERS. They will start on one of those landing pages, get to the website, you know, probably through an advertisement or through a Google search query. They will find what problem they have. They'll click that button as it says, you know, regrow hair. Click that button, then he'll regrow your hair. They schedule a discussion with a licensed physician,

which is either a video conversation, a phone call, or maybe just over messaging. And then they buy the product. And HIMS sells the vast majority of its products through a monthly subscription. So you can subscribe to, say, the hair loss spray, and you get that on a regular cadence. and then they deliver it to people's doorsteps. So you don't have to go to a store. You don't have to go to a pharmacy.

You don't have to go to all that. It can all be done through your own home for these, you know, these aren't, how would I say, very complicated drugs, right? This is not like you need a big consultation to get one of the hair loss products, or at least the vast majority of them. And they want to make it very easy for people to buy them. So to reiterate, they do not deal with insurance.

This is a big selling point to people who can get frustrated with the healthcare system. Yeah, you might pay a bit more out of pocket for some ED pills, but if it saves you the headache and time, I don't think it really matters in the end if it's $10, $15 more expensive per month. And this is why, at least at the moment, they're focusing on relatively cheap products. Now, as we go through, I want to get an overview here because not everyone understands this business. it's fairly new. So I want people to have a comprehensive understanding because I was very

confused kind of in the first week of exactly what this business was. And really at the end of the day though, you know, you have the telehealth stuff, you have like, you have all these websites that are driving people to learn about these problems that they might have and how to improve them. But at the end of the day, the more people that are ordering medication or various health products through its subscription offering the more money hims and hers makes therefore their goal is to attract as many people as possible who are looking for solutions for things like erectile dysfunction hair loss weight loss and can convince them to get a subscription or two um if we go to the history they were incubated by atomic labs in 2017 yes that's right

only what are we in now like year seven perhaps year seven maybe year eight coming up shortly depends on when they're actually founded its founder ceo is andrew dudham who was working for atomic labs at the time it it was an incubator kind of vc incubator one of those type of deals that are trying to incubate businesses uh he still has a relationship with this vc but this is an extremely young business that has grown like gangbusters in the last few years went public the respect during the bubble in 2021. Not much. I think that's too relevant for the history. It's more of like, all right, well, we're building the historical timeline right now. I think I have three things any investor needs to know. It's still run by its founder. So Dutton is still there.

It rapidly raised a ton of money through VCs and now the public markets using that spec. And they're going through the classic Silicon Valley blitzscaling strategy by spending a ton on sales and marketing okay ryan any comments concerns what do you like what what surprised you any any big surprises here yeah i'll let you breathe there for a second the i mean surprise wise yeah i did not know exactly what this business was at all uh you kind of recognize the name and you see the drugs or you see the purpose of the drugs through the commercials but did not understand the backend. So it's nice to get some context there.

I do have one question. What exactly, can you maybe go into depth a little more on the doctor or the physician relationship? Are these, are they paying these people like kickbacks for every drug they sell, for every subscription? How's that working? Do you know? Yeah, I actually had a lot of trouble finding that.

I think they, so it's not included in their cost of revenue it's they're not employees of them so i think it's it's got to be like included in their cost of maybe the kickback on some of these products but it's in there and i'll look at now their gross margin let me define this we're going to define it later if we look at their cost of revenue it includes uh product shipped and services rendered which basically is just shipping their products you know it's product cost packaging materials shipping costs labor costs directly related to revenue generating activities um that doesn't say anything about the doctor's visits but yes what's weird about this one is that technically

these medical groups can't work for hymns and hers but they are you know helping these people so honestly uh it's quite confusing and i couldn't really find it in the annual report uh i don't know if it was a big concern for me but does that does that make sense where it's like they can't technically like there's this weird loophole that they're going through where these medical groups are specifically set up to work for them but they are not working for them in a technical perspective from business side of things so I think from the doctor consultation part it's usually a free consultation so yeah but then they okay the reader yeah they

can't be on their payroll so it's okay yeah and then when they when the customer ultimately does buy these products they turn it into a subscription and it's usually just let's say they chose the one that said uh get smooth skin or whatever they buy that product and then hims and hers tries to convert them into a recurring subscription right well yeah i think you sign up for a recurring subscription i think you can but there's not just one product there's going to be multiple products typically for all these things so you work when you say okay you click on that button whatever one it is or whatever one solution you can read about it and then it'll say hey set up a consultation with one of our uh licensed medical professionals that we can connect you with

which is you know the purpose of the telehealth platform you talk with them they recommend something to you which funny enough oh it's a hims and hers product okay they recommend that to you then you get hop on the subscription so they're trying to make it because people i think get confused generally on what is right for them for a lot of these over-the-counter and out-of-pocket stuff that they're going to be buying like okay well what hair loss things should i specifically use when you talk to a doctor they can recommend it and then you'll buy the hims and hers one does that make sense or excuse me you subscribe to the hymns and hers product yeah makes sense okay let's go through the financial history of this business you shared a chart on social media this

week that highlights hymns revenue versus good rx's revenue which is a similar comp i would say and hymns has been just eating sharing this industry and growing that's probably one of the most impressive, like six years into a business growth charts I've seen revenue wise. And I'm referring to him's not good or X here. So what's been going right? Why have they been able to grow so quickly and kind of what did their economics look like? Yeah. So you are doubling up these sections. So we'll probably get to that one that people listening won't know, but yeah, we'll get to the why I think after us, we get some context on these numbers here. Let's begin with revenue gross profit. As you can maybe see in the chart we're going to share here shortly,

they put up impressive revenue growth numbers and expanding margins. So since 2018, revenue has grown at 104% compound annual growth rate. And if you compare it with GoodRx, well, GoodRx was much, much larger. I think I'll probably share it now. And today, or excuse me, they were much, much larger back in 2018. And today, hims and hers is a larger business. and it's just been quite impressive how much they've grown here. And the thing about it is they've done it with fantastic margin. Yes, so if you can see, GoodRX has grown. Their compound annual growth was 25%, but HIMS and HERS was much, much better.

And if you can see here, their gross margin has also expanded quite impressively. In 2019, it was about 50%. 2020, it shot up to about 75%, and today we are at 82%. so really fantastic unit economics as i mentioned before they basically run okay they got to pay for the product cost right which at the end of the day for a lot of these things are very i don't call them cheap but these are some of the generic stuff like generic viagra generic uh hair loss stuff and you have to pay for that it's quite a bit of a commodity but you slap the hims and hers branding on it you have them go through their consultation and you have a ship to their door

in an easy manner you don't deal with insurance the costs are not that high especially when you're not doing expedited shipping you don't like next day shipping so we got 82 gross margins here and yeah i mean the variable costs are really just product costs shipping packaging costs and labor associated with all these things um as an important note they do not include their support costs um or depreciating depreciation and amortization in the cost of revenue line item and for reference if we look at operations and support it's about 15 of that so if you want to go down to maybe a contribution margin or include that in the cost of revenue you can um i guess i'd leave that up to the listener to decide at the end of the day when we're looking at net income,

operating income, or free cash flow. It's not going to matter. But if we move to the bottom line, speaking of net income, they have historically been unprofitable. However, they're not as bad as maybe some of the other SPACs or VC-backed startups, especially when you compare it to this extremely fast revenue growth. Last quarter, they had an operating loss of $8.5 million on $227 million in revenue. So they're getting really close to break even from an operating income perspective. And I would probably expect them to hit break-even from that point in 2024.

And I think the question is, okay, well, we got 82% gross margins. I think any smart listener is asking, okay, well, how do we get to 0% operating margins? And it's really, you asked why have they grown so quickly? It's the same reason. To be frank, they spend a lot on marketing and this is why they are growing so quickly.

Here is what they have to say from their annual report about their marketing spend. Quote, we acquire new customers and drive brand awareness through various marketing channels, including social media, online search, television, radio, other media channels, presence in brick and mortar retail stores and physical brand advertising campaigns,

which that usually means billboards. So they do a ton of targeted advertisements on places like YouTube, Instagram, and TikTok. They test it out. everyone i think listening to this watches stuff on youtube do a search for hims and hers or something along those lines of on google and then go to youtube you will see probably an ad for hims and hers you can watch how they kind of work there they work with um how would you describe them just the influencer people on instagram and tiktok and youtube to do specific

ads for them um these aren't like movie star actresses or anything like that but it's a how to advertise the products see how you know works it's one of those classic advertisements that really really work because if you have hair loss issues and you see one of these ads you go oh yeah this is you know perfect for me it just fits it's really easy to advertise but they also do a lot of brand advertising and they've gotten this more as they've scaled for example they work with a lot of celebrities they uh worked with the famous tight end in the nfl uh rob gronkowski for hymns and then kristin bell who actress i think yeah uh for hers um yeah and just for the numbers there over the last 12 months they've spent over 400 million dollars on marketing

but back in 2018 they were only spending 55 million dollars a year so it's just grown a lot as they've scaled their revenue as well. Here's my question for you. Do you think they can start to see that sales and marketing expense actually start to decline as a percentage of revenue in the coming years? Because I know it's easy for a lot of companies to talk about it.

And it seems like for the last three years, they've held that pretty steady. Yeah, well, good question, Ryan. It's almost like you have the show notes in front of you too, because they have shown some progress with this. And that's kind of the next chart I have here. Although I think some skeptics may argue it's been too minimal in recent years

as they've really grown this revenue. And the chart I made that'll be in the newsletter is the spread between gross margin and then the percentage of revenue HIMSS spends on marketing each year. So the wider the spread, the more room HIMSS has to, you know, see gross profit drop to the bottom line. And as the largest part of their operating expenses,

this is where they're going to be able to get that leverage if they can. You know, they don't have a ton on R&D, at least at the moment. Overhead costs are just like any other company. Hopefully you're going to be efficient with that, but it's not going to, it's something that can scale, or excuse me, get leverage on as you grow your revenue. So what are the numbers? In 2021, the spread was 25%, but in the last 12 months, it was 30%. So we got, I guess, five percentage points of gain there. We're seeing a little bit of progress. I think over the next few years, investors should expect the spread to widen.

But for anyone that's maybe cynical about this and saying, well, they're not, you know, the unit economics look good but they're not actually generating a profit i would remember that they are currently growing revenue at well okay over the last five years at 104 percent i guess i can get the latest numbers uh 57 50 yeah 57 that was the q3 number run correct yeah so i don't think that's the end of the world if you're currently growing your revenue that quickly end. As we'll get into it, we'll kind of be skeptical about this later. The unit economics are so solid. But is there a secret sauce? I mean, why are they crushing someone like GoodRx or some of these other competitors out there that we'll talk about later? From a product

perspective, there's not much there. I mean, for example, Minoxidil, one of the hair loss spray, that's Minoxidil. At the end of the day, you can't really change that. I think the company is really betting that they have a good product suite, nice looking brand. They're very easy to use website and app that reduces friction. And then they have smart marketing campaigns that can drive these recurring customers to a subscription service. Because if you looked at this three to four years ago, you could say, okay, well, you got $400 million in VC money, but what makes you different than everyone else? Well, they just executed better. And now maybe they can try to separate themselves from the pack,

as we'll talk about later. And yes, this is going to require ongoing marketing spend. This is not something where you're going to see marketing spend drop to 10% of revenue. It's going to consistently stay high as sort of a CPG brand. And I think they are betting that eventually they get some leverage on the marketing spend because right now it's over 50% of revenue. But that's not until they get to generating billions of dollars each year. And as we talked about earlier, it's not like they're hemorrhaging money. They're actually free cashflow positive because of the large stock price compensation expense. But from an operating income perspective on a gap operating income perspective, it's pretty damn close to break even now. Yeah. I'm looking at the chart

here and I can't share my screen right now, but it's been this gradual improvement from March of 2021, it was $40 million in gross profit and negative $48 million in operating losses. Now, it's gone from $40 million in gross profit to $187 million, and this is quarterly. So $187 million in gross profit, and then last quarter was negative $9 million in operating losses. The trend, I think, is quite clear here. It's one of those where you have a very good idea of the direction they're heading. And I guess my second question here for you is, do you think if they cut the marketing, do they, and this kind of leads into the next question, would the existing customers stick around? Do you think they have any sort of lasting competitive advantage? yeah that this is the big question for this company well the the churn part i think it's the big question and the competitive advantage i think we can talk about that to give some context for any prospective investor here uh but we'll get to the kind of churn specifically later maybe

have a discussion on that i think i'm not sure any company started in 2017 will have a significant competitive advantage in 2023 or excuse me 2024 but i think they can be on the right side of the innovators dilemma and if hims and hers has any advantage it is going to be the fact that they are a young lean company trying to disrupt the stodgy medical industry and be on that right side of that innovators dilemma i mean the legacy way oh i don't really i don't think i've ever done this is what do you get prescribed medication so anyone can correct me if i'm wrong here is you know you visit the doctor at the doctor's office you have to wait in that line it's takes a long time then you get your prescription then you go to the pharmacy you have to visit the

physical pharmacy and then you have to pick up your drugs and you have to deal with all this insurance mumbo jumbo which i say that in jest like it just is annoying right for everyone with PIMS, you can do this all from your couch. You can have a product delivered to your door, hopefully in a timely manner, and you don't have to deal with your insurance provider. To me, for a product that's relatively cheap, like the ones that they are going to offer you, it seems pretty appealing. And it might cost slightly more at the end of the day, but it could save you a ton of time that makes it worth it. And by definition, the legacy solution, they can't compete here. They have the doctor's offices. They have the

physical pharmacies and if they get rid of them well okay then they're just the same as hims and hers consultation it also the drugs they are choosing to sell seem targeted at like the 20 well at least on the hymn side 20 to 30 year old males which seem like the most internet savvy the type uh in terms of age demographics the most likely to use this product are also unsurprisingly the drugs that seem to be there what hymns is targeting that at so i kind of said that in a weird way but basically it's it's a product and a strategy that's both targeted at the younger generations yep i have a good quote for uh some context there as well from their q2 2023 conference call quote the patients that come to our platform every day

are first-time customers. And what that means is they often do not actually have a primary physician for which they know the name and have a relationship with. This is overwhelmingly the case for people in their 20s, 30s, 40s, and even 50s. So I think you're right there, Ryan. I don't know. I don't know who my primary physician is, I will admit. I am very confused on that stuff. I pay my insurance every month, but, or, you know, you have that stuff and some people might not pay themselves but i don't know anything about it it's extremely confusing to me and i don't know who all these people are who what he even does why i'm paying well what's gonna happen i don't know if it's the same with you but i'm sure it is the same with a lot of

people and that's the data they have that they're referencing in this quote it's kind of an interesting process i don't know my primary physician by name but especially when you get out of college because you go from being having like a pediatrician basically for until you leave for college and at least i think it's the pediatrician maybe a little younger doctors i think pediatricians can go up to 18 years old i believe so um but i might be getting that wrong anyway you have pretty much the same one until you leave for college and then you come back and you're kind of lost and you have to sort of pick one. And it seems like there's ridiculous wait times wherever you are to find one. So it's just, yeah, this is a much cleaner process.

And you think about like the hair loss drugs, the bald people in their sixties aren't really looking for the hair loss drugs. It's the people that kind of still have their hair that want to prevent that hair loss, which seems to be more in the twenties, thirties, forties. So So, yeah, it just seems well-suited, fit for the right kind of customer demographic here. Okay. Now, I believe that they have the innovator's dilemma on their side here. But do you believe, do you have any concerns about them having the innovator's dilemma versus kind of the legacy medical practice and pharmaceutical process? no i think they're going about it the right way i i do buy that they're on the right side

of the innovators dilemma it's they are so much better at messaging or communicating with younger customers like the hymns and hers branding the hymns and hers marketing it's very clear exactly what they're offering whereas when you see some of those like they're very popular drugs but they have like un words they're basically names you can't pronounce and they're kind of these vague commercials where it's someone walking around in nature and then all of a sudden it's like 30 seconds of disclosures it doesn't feel those don't seem to meet like meet the market where they are today or at least meet the 20 to 30 year old needs and it seems like

hamps has done a really good job on that i i don't think there's anything here where i'd say they have created barriers or they've created a moat that someone else can't replicate but they're currently doing it the best yeah i was gonna mention their moat i think is virtually non-existent today is there a network effect no is there a regulatory advantage no um anyone can really, not anyone. It doesn't take that long to set this up. And you know why we know that? Because there are a lot of competitors out there that got VC backing over the last 15 years. It takes lots of VC money, which is harder to get today. That's true. That's actually a great point. Yeah. But they do have a brand. So I think,

okay, we like to invest in companies with competitive advantages. Everyone does. But But importantly, it's not necessarily, and it's the famous quote that's been thrown around the last, I don't know how long ago this quote was thrown out, but the Todd Combs one, it's not about necessarily the moat, it's about whether it will expand or contract or stay the same over the next five years. And with hymns, I think there is some room if they execute to have the moat expand over the next couple of years. One, and there's a couple ways I think they can do that.

One is increase the amount of affordable products offered on the HIMSS over-the-counter subscriptions or purchases because there are a ton of competitors out there that offer just maybe one of these solutions. For example, if you look at a competitor, Keeps, which is a big competitor that focuses almost exclusively on male hair loss, they have virtually the same products, a lot of the same brand style, it's basically the same price. I'm sure they both have standardized customer support stuff, but if HIMS can work into have a way more comprehensive set of products for people, it's going to have a much better value proposition for customers to stick with them versus the competitors, because you can go to HIMS or HERS for not only hair loss, but everything else. And the more products they offer, I think the harder it would be for one of these direct online competitors to compete with them. Second one, though, that I think they can do is get

and this is not going to be as strong, to be clear, as the economies of scale of an Amazon's infrastructure service. But I think they can use scale to reduce prices versus the online direct competitors. So Keeps, Roman, etc. There's quite a few out there. And with increasing scale, Hims has shown phenomenal unit economics. Now, I think, and they've said, they're going to give back some of these price, some of this unit economics back to the customer. Here's what the CFO said. Well, actually, it's a very long quote, but he essentially said that they think they can get their gross margins to the mid-70s and make the business work. And currently, remember today, they're at 82%, so they can reduce prices here and keep reducing prices a bit as they get

this scale and offer a cheaper subscription compared to keeps Rome, et cetera, and still be profitable. So I think that makes sense to me. It maybe won't be as cheap as some of the legacy solutions or what have you, but it's going to be cheaper than the direct competitors that are still going about them with almost the exact same business model as hims and hers. Yeah, I buy all that. And the other part is you can make, we look for competitive advantages, but you can make

a lot of money in something that doesn't have a definable competitive advantage yet. And typically that's where most of the money is being made is when they are developing that competitive advantage. So it's not an end all be all if they don't have one today, but trying to see if there's any that are developing, yes, it would be great if they had sort of that cost advantage and were able to pass the scale economy shared, pass through some of those cost savings back to the customers. I'm curious whether or not they'll do that. Yeah, they've talked a big talk. I remember reading all the conference calls and they kept saying, hey, we're going to get price

back to the customer. Hey, blah, blah, blah, blah, blah. And they're like gross margins. Well, we want them to be in the 70s, but they're higher and they really haven't done that yet. But they did say that they later, or excuse me, late in 2023, that they reduced prices a little bit. And that actually sacrificed a bit of revenue that'll come through, you know, on the subscriptions in the upcoming quarters. So I think they've done that now once. But it'll be interesting to see how much they do that, if at all, over the next few years, because I think they have the room to do it. Because given that, look, OK, shipping costs, adjusting for inflation, you know, will be the same. and then product procurement

is going to be the same if not lower because these are generic products they're not innovating on anything in that sense you know that's a win

that's a little bit bittersweet because someone can sell the same product on Amazon right or through GoodRx or wherever

but I think the most important brand or excuse me that's a little tease there most important competitive advantage expansion

will be building a trusted brand I mean I'm not talking about you know, these targeted advertisements that they really smartly used on Instagram, but I'm talking about classic brand marketing that they can employ on, you know, TV, podcasts, billboards, et cetera, et cetera. Soon, I think they will be spending over a billion dollars a year on marketing, which I think is a good thing versus some of these direct competitors, because

you can, you know, I don't really think of them as a telehealth company. That part is essentially a commodity. It's not that important for them, especially because they're not dealing with the insurance system. I think of them more as a CPG company looking to build a trusted everyday brand for consumers that's utilizing some of this modern technology that a lot of the legacy providers aren't going to be utilizing. Yeah, I think that all makes sense. Let's talk about the management here, or more specifically, the CEO and founder, Andrew dedim i believe pronouncing that right yeah kind of like the dump you know yeah the netflix thing yeah it's the netflix intro right yeah uh yeah what are your thoughts on well let's give some

context so 34 years old uh classifies himself as a serial founder and angel investor as i mentioned above still has a relationship with atomic labs uh which was incubate incubated hymns and hers eventually i'm gonna be honest i don't like the term serial founder i know well that's hey i'm saying what the company says in its filings so he owns 13 of the company but importantly has 90 voting power due to the heavily disproportionate voting rights of the class the common stock that he owns it was not like the classic 10 to 1 voting power i think this was over a hundred to one so yeah that's important for investors i would say this is the good luck running an activist campaign exactly that's why it is important for something like

this now i will say and this is important for how i'm going to do this section he quote tweeted our chart comparison of hymns and good rx i think he was probably searching the cash tag because he doesn't follow us um anyone can look at that i have it linked in the newsletter so i will say it's possible that he is listening to this. If he isn't, even if he isn't, I'm still going to address this section as I'm asking questions to him if for some reason I got the chance to talk to him

in an investment, you know, as an investor talking to a management team. Now, here's the list of the questions I have after reading the proxy statement and all the information about him and his relationship to this company. First, here's a quote from the proxy statement. He, Dudham, is a serial founder, active angel investor,

and advisor to various startup companies, including ShareBig Ventures, a China and US-based early stage venture capital firm. If I'm asking him a question, I would say, do you believe these other endeavors distract you from running hims and hers? Assuming no, why not? And how much time are you spending with these? That is what my first thought I had when reading those. Second thing, the class V common stock gives you 90% voting power of this business. Do you think this is necessary and a healthy way to run a company uh we maybe answer some of these later i'm just going to go through okay i don't want to read the full quote of this one here but basically atomic labs recorded uh got 3.6 million dollars in payments from hims and hers for services that

they provided them do you would you describe this as self-dealing because this was included in the what do they call it related party transactions right so basically hims and hers paid atomic labs 3.6 million dollars in uh fiscal year 2022 the last year we have a proxy statement on um yeah i'd really like to know what i'd really like to know what that was what those services were, is that something that could have been done by, is it like consulting? Like, were there people there that, you know, help you raise money or something and made some good slide decks and connected you to some other VCs or whatever? Like, is that what the services were or was it something a little more self-dealing?

That would be something very much worth knowing. Yeah. Cause if I'm a shareholder, that's the money that could be paid to me. Yeah. Yeah. Okay. Next one. Your ownership stake in HIMS and HERS is currently worth $234 million. And this is not including options and stuff like that. You have no personal financial restrictions

and you never have to work another day in your life if you don't want to. Why are you paying yourself a $600,000 base salary each year that grew in 2022? Now, that one's not that bad. But here's the next part. In February 2022, the Compensation Committee established a threshold target and maximum achievement level for corporate performance metrics, annual bonuses. In 2022, your metrics were revenue and adjusted EBITDA. Your minimum target for your revenue bonus in 2022 is $350 million and adjusted EBITDA was a loss of $33.6 million. You actually generated $527 million in 2022 in revenue and an adjusted EBITDA loss of just $15.8 million. Here are some various questions I have about that. Do you believe these are metrics that quantify whether

HIMS is creating value for shareholders? Do you believe your targets were reasonable with how fast HIMS was growing at the time? Do you think an adjusted EBITDA loss is a good target to have when paying out executive bonuses? Last one, as I know we're rambling, but this is important here. In 2022, you got over 500,000 RSUs, 1 million stock options, and a special CEO performance award of 2 million options that vest on the basis you are still employed by HIMS through 2026. There are no stock price metrics there or any sort of performance gold associated with these options. From what I could tell, proxy statements are extremely confusing, and I wish you would fix that. Why do you need these stock awards if you already control hymns and have no need for any

other... Well, you're already wealthy beyond anyone's imagination. I could go on. Clearly, for me, there are a lot of red flags here with this proxy statement, and frankly, a lack of trust in this guy watch what he does not what he says he sounds great in interviews i listened to a couple of them sounded awesome this will probably keep me away from investing in this company ryan yeah yeah this feels based off some of the stuff you pulled here it seems like this is riddled with bad incentives like for example if you are paid on adjusted ebitda targets you can therefore spend a lot of money on stock-based compensation without it affecting that hurdle without you know you can spend without spending essentially when it comes

to your own uh payments on top of that if you're spending a lot on stock-based compensation you as the founder major majority shareholder voting wise you want to retain your ownership so in order to offset the dilution of your ownership that you've been paying out in stock-based compensation, you're going to gift yourself more options so that you can kind of retain that ownership level once again, further diluting shareholders. The other thing for me here is $600,000 base salary, probably on the low end for most CEOs. However, you are so far away from losing voting control that you have a lot of stock you could potentially sell. I don't think you need to take – it's not the end of the world.

$600,000 is really not the end of the world. But I think you could take less if you have that much voting control and that much – and your shares are worth $240 million, whatever it is. So, I mean, you think about the best managers, the ones that own a ton of the stock, the Warren Buffetts of the world, they take what 80 000 salary jack dorsey took like famously like 30 cents in base salary or something like that it's kind of the thing that just doesn't need to be paid out and it just makes me think how much do you care about minority shareholders yeah okay on the one hand it's

indefensible i think i would never do this i don't think anyone should do this that is in this situation you're not taking care of all your stakeholders on the other hand bartomey thinks it shouldn't keep me away from investing in a company because virtually every company does this so what am i not going to invest in anything right yeah you know what i mean companies have better targets yeah that's fair the difficulty with the business i think at this stage is you're not going to it's not going to be perfect yeah it doesn't it's really not the end of the world i think a lot of pretty much every company we look at like you said has this and especially for a young company

it's not going to be perfect i just i don't know some of this stuff some of this stuff concerns me however even with the horrible like targets that they had which adjusted even to a loss of 33 million that's pretty terrible they still produced really good results last year better than expected profitability even though it's not legitimate profitability but getting close and then uh revenue absolutely crushed their expectations, which maybe that meant it was a low ball thing. That's what I'm concerned about. Yeah. But the execution is there. They are executing very well. So you can't fault them for that. All right. Let's talk about upside here, realistic kind of outlook for the stock. What have you modeled out for financial projections

through 2026? Yeah. So any longtime listeners know we keep modeling simple. I'm not going to try to tell you what forward returns are going to be. I'm not going to say, oh, it's 13%, not 11%. I have no idea. I'm hopefully going to illustrate versus the price today what they could be earning on a per share basis in a few years time. We only like to do a couple of years out. Keep it simple. Here are my assumptions. Revenue grows at an average of 40% over the next three years. You might say that is high, but that would be a deceleration and there is a ginormous addressable market out there. They've shown very consistent growth in subscriber numbers and average and total orders. So I don't think that's a crazy number. Could be a little lower, but I think

that is reasonable. Second, shares outstanding grow by 4% each year, as we talked about a lot of SBC. Stable gross margins, 81%. No leverage on operation and support costs, R&D, and then slight leverage on general and administrative costs. And the important one is I have marketing as a percentage of revenue going down from 51% on the last 12 months, that's the actual, to 35% in year three. Under this scenario, operating margin climbs to 10% in year three, and they will be generating $217 million in operating income. Even with share dilution, that would put the price to operating income, you know, this has the SBC in there, at below 10, which I think is probably pretty cheap. But there's also potential, they're going to be

generating cash, you know, there's also potential to juice returns and get that even lower with buybacks, because they are going to be very cash generative over the next few years. What I've highlighted in the newsletter is kind of the concluding part of the financials and the projections for the stock price, and then I'll get Ryan's opinion on it, is the key variable in this model is the amount spent on marketing. If they can grow marketing expenses slower than revenue, I think the stock works. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya, and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned,

and today i'm still figuring it out somehow things usually get worse before they get better apparently that's how i roll so bundle up and come along for the bumpy ride stream a new episode of north of north tuesdays on cbc gem yeah it would that is obviously the big question though is whether or not they're going to be able that do that. I think under the scenario that you painted here, they would get to $217 million in operating income in year three. If you have a business doing that much in operating income and it's growing 40%, it's going to be worth a heck of a lot more than a $1.5 billion enterprise value.

So it seems like if they continue to grow at the speed and your projections are anywhere near accurate, this is going to be a great performing stock. Do you think the revenue projections are unreasonable? 40% is pretty fast over three years. They're going 50% right now, but it's come down pretty quickly. Fair. Yeah, 100% first four years though. I always have a hard time.

It just kind of takes me back to 2020, 2021 when I was looking at companies and modeling out like 30% revenue growth and I just got destroyed doing that. Yeah, yeah, I agree. I find, I gave myself a rule that if I am modeling out more than, it was like more than 25% revenue growth,

it's probably not in my wheelhouse like it's right it's a very bold investment yeah if the investment gets killed because they grow revenue at 20 for three straight years versus 40 maybe it's not as cheap as you think but you know hey they could get better leverage like the profit margins could be much higher because we talked about 80 gross margins i'm only modeling 10 there so you know i think my rule was actually if i'm modeling more than 20 revenue growth annually for like three to five years and i'm getting less than ten percent returns then i'm concerned oh yeah yeah yeah yeah i think here we could get higher though yeah yeah i think in this case there's a lot of upside so it's not like you're it's not like it's all

priced in already it feels like there's ceilings kind of endless here and it feels like there's a very large market to go after so lots of upside the difficulty here's here's where i struggle say this is a business where they just continue to pump out marketing which it's hard to say whether or not that's the right thing to do and they keep marketing as a percentage of revenue flat there's never going to be able to be a point where a rational investor who thinks the business first of all that's a concern that means you probably are having to reacquire customers or you gotta your marketing is keeping your revenue growth afloat but the other part is you're not gonna have a rational investor that's able to step in and change that because the voting power or the

the voting structure, it's like, you really got to be backing the CEO here and the founder because it's his ship. Three words for you, Ryan. Rule of 40. No, I'm joking. That doesn't matter. That's a flawed metric. But what revenue growth do you think, if they're breakeven, you're like, oh, you know, because

I think honestly, you know, if they're still growing 50%, 60%, we make fun of the rule of 40, but if they're breakeven and revenue grows 50, 60% still, and this thing's climbing to a couple of billion dollars in revenue here pretty quickly, I don't think I would be upset as a shareholder. No, there's a part of me that just wants to take a flyer on this, honestly, make it a small position. Let's get to some downside here. Do you want to maybe ask the next question?

Sure. Yeah, let's look at some of the risks. What are the risks in your opinion and any red flags? so we talked about the biggest risk is that marketing is keeping uh churning customers afloat where they're they got a leaky boat right that's the big concern is that subscribers aren't sticking around they really didn't give any good numbers on that they are the classic company oh we don't discuss churn oh we can't we can't discuss churn oh no like oh well okay give out every other number but one of the most illuminating things you can do i think i learned this from

someone else is to search the company you are looking for and then is a scam in Google. And then I, and usually if you toss in Reddit there, there's some Reddit complainers that always pop up. So I did this with hims. I did this with hers. And I also did it on both apps on the app store. I got some interesting results. So here's something from four months ago. I'm not going to read the whole thing because Reddit posts tend to be quite long. So here's what the person said. They went through the questionnaire. I asked for a particular medication because of its fast acting nature. Nurse changes medicine to complete the opposite one and asks if I'm good with it. I said, no, cancel it. And then she says, I can't cancel it. Too far in the process.

Gives me a link for the refund policy. Read the policy. Oh, there is no refund, even if they ship you things you didn't ask for. This all happened within 20 minutes. chat with support nothing they can do so i'm out 117 dollars for a medication i didn't ask for or want um various stuff similarly on like quickly getting you through this process and maybe subscribing you to something you don't even know about on for hers as well that that one was for hymns i don't think i can read all of these i have them linked if you want to read the full things in the newsletter but basically the two overarching things because i tried to read a few dozen of these and there's quite a few of them so this is not a one-off is one they speed run you

through the acquisition of the product right so they subscribe you maybe even before you even want to and then if you want to unsubscribe they make it difficult so as i was telling ryan earlier the wall street journal strategy they get impossible to cancel although they've changed that and then there might be some um uh regular there's regulation i think that came in there that makes it much harder for people, or excuse me, easier for people to cancel those type of things. Now, I'm a little conflicted here because the evidence seems to support anecdotally that they are trying as hard as possible to get people to order subscriptions and then make it really hard to cancel. And this can make churn look good right now. And it's going to make revenue growth look

great in the short run. But it does no good for building brand trust over the long term. I mean, they need to take care of these customers and not think of that, you know, now all these customers with these reviews they have a negative they think of hims and hers in a negative light but my question is okay what percentage of the customers are like this is it less than one percent i think maybe we've got some bad reviews too you know i know yeah you can't it's going to be a part of life as a subscription service this type of stuff please everyone it's got a lot of upvotes so that's a little concerning but yeah there's a lot of people Well, a lot of the comments and replies were, same thing happened to me, bro.

Oh, bro, dude, that same thing. Same thing. There's a lot of those. I would check those out if you're an investor in HIMSS. Just search those online. Yeah, I don't know what to think of these. Here's my concern when we look at the stock overall. First of all, actually, why don't I start with you?

Because you've done the majority of the research here. Do you like the stock? Any chance you own this? I am not buying today. I'm not buying today. for two reasons. And I think one is the concerns over the churn and these reviews that I'm seeing online. And second is management integrity, specifically the one person that controls everything here, caring about shareholders. I don't think they proved that yet.

But, but, but I think this can be a 10 bagger over the next 10 years. I think the stock looks cheap versus like kind of a risk reward perspective of how big this business could get in these various categories that have $10 billion in spending. They're eating the competition, the direct competition, and they have a potential for mode expansion

to build a trusted brand, but I need management I can trust. And I think one way they could build trust with me and potentially other shareholders is to fix these quality control issues with customer support and subscriptions. Admit you make a mistake here because it seems pretty clear that they are.

There's a lot of reviews here that says they need to fix this. Yeah. I'm conflicted. I'm conflicted here on this one. Not buying. I have been burned buying revenue growth stories

and it feels like this could end up similar. GoodRx, there was a point when GoodRx was growing 50%, 60% on the top line. They were operating income profitable. One, it's an industry I don't know that well. Sounds like I can probably get a grasp around it, but not totally sure. The other part is lots of red flags in the proxy, and I'm not 100% sure they can pull back on marketing without seeing revenue growth declines. Yeah. The thing with me is, okay, if they pull back on the marketing spend, yeah, and they get

profitable, the stock's probably going to go up and you'll lose out on the returns. But I'm not confident what the result's going to be. I left this one open for the last section here. It's pre-mortem and conclusions from this episode. What do you think? I guess maybe I can go second here. As someone, you kind of were basically listening to my research report. what would you say is a pre-mortem for why this could go badly as an investment and

kind of conclusions from looking at this company yeah go poorly is that the uh the churn is really high and that the economics are masked by uh perpetual marketing spent 500 million dollars in marketing spend is masking significantly elevated churn. I think eventually that comes back to bite you, and at some point they start to run out of cash.

So, even though they're cash flow generative, at some point investors stop funding that business because they're not profitable. They're not truly profitable. So, I would be

I don't know, just perpetual unprofitability and or worse they go like the way of stitch fix where it's like okay we're going to rationalize costs and it's like those costs were the only thing keeping your top line afloat stitch fix is a good comparison here of what could go wrong yes i agree that's my worry i would love some churn numbers i imagine if they're not giving them i mean this is probably a high churn business to begin with but if they're not giving them i'm afraid it's because it's quite bad yeah yeah i agree with those i think conclusions here is that no matter how sexy a business looks you gotta stay reasonable with the management team

and or you'd be rational about what they are and they're not showing to be the best right now um even though maybe just a couple maybe just a couple shares i might i might take a flight on the fund anymore so like we can just invest how you yeah yeah you can invest single share of a shit co if we want not a shit co sorry i do picture the ceo listening right now buy we can buy stuff that are a little more early stage and not be not have anyone to report to yeah less of a uh feeling of responsibility to other people yeah i agree i agree but maybe that was a good thing to not make mistakes and investigate unprofitable stuff like this but yeah i mean i could see this thing being like i said a 10 beggar i think my final conclusion is

early stage basically how i would describe it is somewhat as a cpg brand but with obviously the healthcare twist they are high risk high reward you want to take a bet on this i would size it small yeah i totally agree i think that should wrap things up yeah for anyone that you know that's going to be a it for hims and hers i'll hit the disclosure here but do you have a stock on the top of your mind that i should research next ryan if not maybe i'll throw out some ideas here i do not have any for you i will uh foreshadow here we're talking booking holdings next week been doing some research they're very different business than hims and hers uh very different uh stage of its life cycle if you will so interesting business very cash flow

generative and one that is not as expensive as i was expecting which is always a delight to see once you finish your research and you're like oh okay this might be you know now i now i really dig in so it uh yeah i'm excited for that one what uh what do you have top of your mind i was there's one the go-go and flight one which is not actually those little video things you watch it's the aviation internet company i think that was interesting it looks extremely cheap but there's the starlink competition i also think the ansys and synopsis merger could be interesting um that you're not gonna pitch the hawaiian airlines merger no no what i don't know if you saw the meme i threw out but the yeah the arrested development one you know it never works right

but it could work for us the hawaiian airlines one that spread though yeah it's gonna be yeah well so was the spirit air one all right i guess nothing on the top of my mind but i'll whenever i aside, I'll say it on the podcast and I'll be spending the next month researching and hopefully doing something similar to this. And for anyone listening here, okay, anyone still listening, if you like these type of episodes, let us know. If you don't and you find any flaws or any ways we can improve these, also let us know because this is kind of similar to the not so deep dives, but slightly different as we're trying to, as I said, improve the quality, but decrease the quantity, quantity of the output and do individual research and then basically present it to each

other. Let's hit the disclosure though. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, and any podcast guests may hold securities discussed in this podcast. We may have held them in the past and we may buy, sell, or hold any stocks mentioned here in the future. Thank you everyone for tuning in and we'll see you next time. We'll be right back.