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Edited by Brian Birnbaum.
Hims is running the same algorithm as Amazon and Costco.
The world’s top companies follow a blueprint: they solve a growing volume of acute customer pains over time in a manner impossible to imitate. This equation elegantly summarises Amazon’s and Costco’s 209,033% and 110,800% returns since IPO, respectively, for example. This is also true of companies like AMD and Tesla, which have multiplied the capital I invested a decade ago by 40 and 14 times, respectively. Last but not least, this is also true of Palantir and Spotify, my two latest winners.
The aforementioned blueprint reveals that a small minority of investments can and likely will make up the vast majority of your returns over time–that is, you allow the causal mechanism behind the powerful force of compounding to let your winners run. It so happens that Hims appears to be a near-perfect instance of this blueprint, with the company’s core value drivers accelerating quarter over quarter. It may seem far fetched to many, but 100x is the sort of return you get over the long term when you jump in early on and hold.
To manifest the blueprint, a company must ultimately create a platform from which it can launch new products and services at marginal cost. In turn, Hims must reinvest the capital yielded from these new products and services to increase efficiency–i.e. Increase yields. For Hims–as is the case for Amazon and Costco, that means increasing yields at lower prices for end consumers. This pattern of reinvesting capital in order to lower prices for end customers was first coined by Nick Sleep as scale economies shared. By sharing economies of scale over a long time, competitor emulation is rendered impossible.
This blueprint is a particularly powerful model in this age of platforms. And what’s surprising is how the blueprint plays out time and time again, for all to witness and study ad nauseam, and yet the market still fails to recognize the pattern, even when the company becomes more established. Instead, the market oscillates between seeing Hims as a Viagra dispenser to an opportunistic GLP-1 knock-off distributor, all the while failing to understand that Hims is building a platform from which it can launch new healthcare verticals at a marginal cost.
Hims’ capital expenditures have trended up as cash flows increase, suggesting both high returns on capital and further growth ahead–the twin engines of stock returns. Simultaneously, as I first spotted in the Q4 2023 earnings digest, Hims is actively reducing prices for customers that opt into longer duration treatments. Gross margin ticked up from 82.62% to 82.74% quarter over quarter despite the price reductions, enabling me to see that Hims is manifesting the blueprint for scale economies shared.
The weight loss vertical has gained considerable traction over the past few quarters. It’s currently dilutive to margins, as is historically the case for Hims’ early launches. New verticals may blur the numbers over a few quarters, but the company has revealed its genetic composition. Additionally, as I will discuss in depth, the weight loss vertical points to second-level KPIs that the market is missing and are indicative of a considerable acceleration of growth over the next year or so.
There are many platforms around the world, but Hims caught my eye because of the number of statistically unlikely challenges they’ve managed to overcome in rapid succession while operating outside of the traditional insurance system. As I describe in my first Hims deep dive, the US healthcare market is a monopsony, which means there is just one buyer. The only buyer is insurance companies, which means that healthcare providers across the nation have the incentive to raise prices because it gets amortized across the insuree base without their authorization. While some believe Amazon will quickly kill Hims, the company has built out an infrastructure practically without meaningful competition while printing cash and operating outside the system in a cut-throat industry.
This is a statistical anomaly, which points to a very lucky and/or extraordinarily talented management team and, by extension, notable corporate culture. My view is that growing cash from operations (graph below) points to a moat. Either the $4T US healthcare industry is not interested in gobbling up Hims’ revenue, or, at present, it simply can’t. The two cannot be true simultaneously. We’ve seen large companies with prominent distribution networks and much larger customer bases attempt repeatedly to enter the space and fail. This includes Walmart, which recently shut down its telehealth services.
Thus, the platform is not only printing increasingly attractive financials but also exhibits some early qualitative signals of moat formation. Neither Palantir nor Spotify had strong moats at age seven, but Hims is already defeating much larger players that, in theory, have the necessary assets to disrupt it. What’s particularly noteworthy is that Walmart shutting down its tele-health operations coincides with Hims accelerating the most essential part of its operation: vertical deployment and maturation.
The qualitative signals continue pointing to an extraordinary organization. As of Q2 2024, Hims managed to deploy and mature its new weight loss vertical within one third its historical required timeframe. Seven months into the operation, the vertical had over 100,000 customers and a $100M revenue run rate. This points to an underlying mechanism that’s gradually shortening the company’s deployment and maturation times.
Since free cash flow is also a function of average revenue per user, quicker deployment means accelerating free cash flow growth going forward.
The key underlying enablers are:
selling below copay; and
management’s ability to pick new healthcare verticals with a positive return on investment.
Selling below copay essentially trumps all other value proposals in the space. Management’s ability to select new verticals (together with the platform’s ability to deploy each new vertical at a marginal cost) promises to print much more free cash flow than at present. Indeed, I’d argue that free cash flow growth results, indirectly, from being the only player in the US healthcare industry to solve these acute pains with convenience and cost-effectiveness.
Over the long term, should the company continue executing this algorithm, the number of verticals on the platform will approach a critical mass beyond which shifting to another platform will scarcely make sense for customers–as is the case with Amazon. Once this tipping point is achieved, I believe that Hims will go one to become one of the larger US healthcare players. Naturally, there is no certainty that this will happen. But I continue to be long because the platform continues to grow, solve more acute pains for customers, and share economies of scale.
All factors point to a company that is likely to get much larger from here. Indeed, operating in a $4T industry (and I don’t believe Hims will limit itself over time to just selling pills), at a market cap of just $4.28B, the company has a long runway ahead. A $400B market cap is simply a matter of Hims executing its current algorithm over a long time. Additionally, I believe the most valuable component of the business will be the AI model/s they will be able to train via their closed AI loop. The AI that emerges from this dataset can over time evolve to be Hims’ primary source of revenue.
Until next time!
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Great piece. Couple of questions. First, what’s the evidence that HIMS has an explicit policy of sharing scale economies with customers? Second, why is HIMS a superior business concept to Teladoc? Thanks
Thanks for sharing the update, Antonio. I agree with your analysis. I do believe the AI enabled EMR and MedMatch technology can evolve into a revenue generation opportunity for them, similar to AWS is for Amazon. Disclosure: I have a long position in HIMS