It's Hims vs Amazon Now.
Update
Edited by Brian Birnbaum and an update of my original Hims deep dive.
Amazon may indeed compete with Hims. But the probability of Hims succeeding is material. The graveyard of Amazon’s attempts to compete with specialists is littered with such examples.
Amazon fields the world’s strongest fulfilment network, which it works constantly to improve, increasing delivery speeds and decreasing costs. But Amazon is also a generalist. The company fills orders of practically infinite breadth.
Hims, meanwhile, is a specialist. It works solely toward optimising patient outcomes per dollar spent. Although fulfilment is a crucial component of the equation, optimising patient outcomes per dollar requires more than warp-speed delivery at the lowest price. It’s about innovating in healthcare in a way that large players likeWalmart and Amazon have not been capable of to date, let alone the healthcare industry itself:
The difference between a poison and a cure is the dose. Improving outcomes per dollar spent is about figuring out the right dose for individuals, at each step of the healing journey. It’s also about drawing up a holistic long-term plan that increases the efficacy of the drug in question. This gets even harder as you treat a growing number of conditions. Therefore, to successfully leverage its fulfilment network against Hims, Amazon needs to really focus on healthcare. Is Amazon willing to do so more than they did music, for example?
Amazon has three main businesses: ecommerce, Amazon Web Services, and now advertising. Historically, the first two have drawn top talent because that’s where Amazon’s focus is. This is why, in the past, Amazon’s ancillary businesses haven’t always evolved into best-of-breed. Notable examples include Amazon Music and Prime Video, both of which are overshadowed by Spotify and Netflix, respectively. Most interestingly, Spotify and Netflix have not only competed with Amazon, but with many other large companies simultaneously, including Apple.
The reason Spotify and Netflix have succeeded is simple: they are more focused on the end consumer than their competitors and, in many ways as a result, have extraordinary organisational properties leading to accelerated iteration. In the digital space, marginal advances in user experience amount to exponential advantages in adoption. These advantages are often imperceptible to most investors until it’s too late. In Spotify’s case, the market is only starting to realise there’s no real competition:
In April 2022 the market came to the conclusion that Netflix had lost its edge, with the “streaming space” getting crowded. The stock declined over 72% in 2022, only to rise over 355% from the lows. Because I’m not an investor in the company, it wasn’t clear to me at the time that Netflix’s machine is simply more finely tuned than that of its competitors. Over the long term, their capital efficiency is higher, leading to more profits and thus more capital reinvested–and so forth. Netflix is thus marginally better at producing hits and enhancing the user experience of its platform, such that over time this translates into an unfair advantage.
Every dollar Netflix reinvests translates into more value for the end customer. In the graph below you can see how Netflix's free cash flow per share has trended back up from the 2022 dip. What’s fascinating is that when Netflix announced they were including advertising plans, the market interpreted this as Netflix admitting they had lost pricing power. Instead, this move has made it far more difficult for competitors to imitate the Netflix machine, giving Netflix an even bigger advantage over competitors.
The Netflix case teaches us how focus can pay dividends over time.
Block is another instance in which specialisation overcame Amazon’s firepower. Although I don’t like Block as an investment, they’ve maintained faster iteration and a higher level of focus on the end customer. In 2014 Amazon tried to compete with Block, taking on Square Sellers, before surrendering by late 2015. Block co-founder Jim McKelvey was fascinated by the event and went on to study it. He coined the term “the Innovation Stack” to refer to when a small company defeats a much larger one with abundant resources as a result of superior focus.
I’ve explained a number of times that I believe Hims is a statistical anomaly. Their achievements to date are either the result of luck or of extraordinary management. Their execution streak has me leaning towards the latter. Hims’ primary objective is optimizing patient outcomes per dollar spent, while selling below copay. I believe that this function will yield a more finely tuned machine over time, a la Netflix.
Further, it must be noted that Amazon has been making attempts to enter the healthcare business for quite some time. In 2019 Amazon acquired PillPack, an online pharmacy that specializes in sorting and delivering prescription medications in pre-packaged doses. Building on the PillPack acquisition, Amazon launched its own full-service online pharmacy in 2020. In 2023 Amazon introduced RxPass, a subscription service for Prime members that offers a selection of generic medications for a flat monthly fee. In June 2024, Amazon announced the launch of a Hims copycat, Amazon One Medical, followed up with the announcement that it would be offering telemedicine services that spooked the market last week.
None of this has stopped Hims from growing free cash flow at the rate depicted below, leaving all competitors in the dust. While this doesn’t mean that Amazon can’t compete, I believe that Hims’ algorithm is likely to be superior over time. In turn, as of Q3 2024 just over 50% of Hims’ subscribers were utilising a personalised subscription. As this number increases and subscribers receive treatment for a broader range of conditions on the platform, dosing each subscribers with pinpoint accuracy will become more and more difficult to emulate.
To me, this week’s panic is superficial–the result of a large investor base that hasn’t done enough due diligence. To them I say, take my course and learn to analyze companies in depth before you purchase stock. Personally, I will only sell Hims if I believe that the fundamentals point to depressed free cash flow per share growth. At the moment, I see no evidence of such. Should Amazon really step up and compete, long term I believe this could even strengthen Hims over time. World class competition is sometimes essential to becoming a world class company, and I believe Hims has what it takes to get there.
Until next time!
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