Hims: Extraordinary Execution.
Hims: Extraordinary Execution.
Q1 2024 ER Digest
This is an update of my latest Hims deep dive and Q4 2023 ER digest.
This week we’ve surpassed 1,260 deep divers on Youtube! Come join the madness:
Edited by Brian Birnbaum.
1.0 An Optimization Machine
Hims has 100X potential over the long term, due to its ability to bring down costs when the rest of the healthcare market is doing the opposite. This dynamic is further accentuated by Hims’ ability to drive personalization and leverage, while reinvesting more and more capital into the business.
Hims is profitably disrupting a growing share of the healthcare market while operating outside of the otherwise inescapable insurance system. The statistical unlikelihood of this feat, together with the breadth of the challenges overcome, suggests that Hims is an extraordinary organization run by highly capable individuals.
The market still underestimates the complexity of Hims’ operation. Amazon CEO Andy Jassy alluded to this in the Q4 2023 earnings call:
[…] if you think about what we do on the retail side, adding a pharmacy capability is a pretty natural extension. It's something that customers had asked us for many years, and it's got more complexity to it than the rest of our retail business.
Further, the moat grows stronger as an increasing percentage of all customers opt in for personalized treatments. Personalization non-linearly increases the difficulty of emulating Hims’ vertically-integrated pharmacy infrastructure and increases retention by making it all the more difficult for customers to substitute Hims out.
In Q1 2024, 35% of subscribers were receiving personalized treatments. Nominally, personalized subscribers are up threefold from Q1 2023, another demonstration of Hims’ world-class execution. According to management these customers are also opting into longer duration treatments.
At this rate, within a few years most subscribers will have opted into personalized treatments. In turn, as Hims generates more data on what does and does not work for customers, the degree and value of personalization is likely to increase over time. This should make Hims a more defensible business going forward.
[…] we like to dive deep into the data of understanding why customers are canceling, and try our best to address them directly with the next level of personalization launches.
-Andrew Dudum, Hims CEO during the Q1 2024 earnings call.
Meanwhile, Hims has decreased prices for customers that opt into the longer duration treatments, further exacerbating the difficulty of emulating the operation profitably. Hims is doing so while driving leverage in both the gross and operating margins, further evidence of organizational quality.
The price reductions are a manifestation of Hims’ philosophy to seek out the most accretive avenue to returning value back to consumers. In this way Hims is emulating the world’s best companies, such as Amazon and Tesla. For every increment of scale and efficiency, Hims goes out of its way to increase accessibility and convenience for customers.
What makes Hims’ business model all the more effective is its antithetical position to the traditional healthcare industry, whose lack of innovation and value proposition will likely enable Hims to compound considerable goodwill over time with customers. While some consider Hims to be relatively limited, I believe the company will expand far beyond its little corner of the healthcare industry.
And so, continuing to find leverage in the operational efficiency, or automation or throughout the business and give that back to customers is the core philosophy.
- Andrew Dudum, Hims CEO during the Q1 2024 earnings call.
Most of the additional leverage gains over the recent quarter stemmed from increased marketing efficiencies. Hims is broadening its acquisition funnel and reaching customers at earlier stages of their journey. Marketing as a percentage of revenue improved 400 basis points to 47% QoQ.
Expanding the breadth of its offerings allows Hims to move beyond narrow marketing channels, which command a premium due to their relatively targeted nature. Because of product and distribution expansion, Hims has continually raised the odds that any given person needs its products, enabling leverage over more generic channels and lowering the cost of customer acquisition.
Although a reliance on paid marketing is not optimal, Hims has demonstrated mastery over the process. It relies on paid marketing because the conditions Hims treats are those which folks would rather keep to themselves. However, with the move towards more generic marketing channels, Hims can gain increased mindshare.
By moving towards ads on popular TV or Youtube channels, for instance, Hims can carve a more prominent spot in the mind of the average American.
We can already see this happening:
We are seeing users actively seek us out, either by visiting our website directly or through other cost-effective channels.
We believe this is happening as users associate the Hims & Hers brand with the treatment of a breadth of conditions and are seeking treatment on our platform, either the result of recalling prior messaging that they saw or increasingly through word of mouth from friends and associates.
- Dudum, Hims CEO during the Q1 2024 earnings call.
Gross margins came down slightly from Q4 2023, which means the marketing efficiency increase has been the main driver for the profitability uptick seen over the same period. With marketing being a large expense for the company, this quarter shows how accretive marketing advancements can be to the bottom line.
If Hims realized organic growth, investors will benefit from tremendous additional leverage.
2.0 The Path to 100X
If Hims simply carries on doing what it’s doing, the results can be spectacular just a few years from now.
Hims is solving a growing volume of acute customer pains, in a way that is increasingly harder to imitate. By reinvesting higher volumes of capital over time, Hims stands to potentially snowball into something several orders of magnitude bigger and more defensible.
CapEx continues to reach new highs as management remains committed to reinvesting into the business. Free cash flow came in at $11.9M in the quarter, with cash from operations exceeding the $10.6M of CapEx that was directed largely towards improving affiliated pharmacies.
At the growth rate seen since Q2 2022, four years from now Hims will have just shy of seven million subscribers. While the future is uncertain, it’s likely that Hims will continue acting as an increasingly deflationary force in an otherwise inflationary healthcare market.
Unless we see a reversal of the inflationary tendencies of the US healthcare industry–highly unlikely given the system’s corroded foundation–Hims’ tailwind should magnify with scale. I remain extremely bullish on this organization, marked by my recent conversion from prospective investor to outright shareholder.
Until next time!
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