Hims and Hers. Equity Research! Part 2/3
Management, Competitors, Moats, and Risks.
Welcome to Part 2 of my Hims and Hers Deep Dive!
In Part 1, I explored their business model, GLP1 shortage, and subscriber statistics! I recommend people give it a read before continuing further!
Hims and Hers. Equity Research! Part 1/3
In 2023, the US spent $4.9T on healthcare, around 17.6% of its GDP. This makes the US healthcare system by a large margin the most expensive in the world, yet it has the worst outcomes.
In today’s article, we will explore Hims and Hers management, competitors, and risks.
Additionally, an analysis of Hims moats will be provided!
Let’s take a look!
1. Management
2. Competitors
3. Moats
4. Risks
5. Part 3
1. Management
Hims is led by one of the co-founders, the 37-year-old San Francisco native, Andrew Dudum. After graduating from the Wharton School at the University of Pennsylvania with a degree in Management and Economics, Andrew worked in the venture capital industry.
As Dudum doesn’t have any medical education, he has hired a team of medical professionals that are led by Dr. Pat Carrol, a Dartmouth-educated doctor with decades of experience.
It is important that the management is fairly compensated so they are motivated to grow the company for the benefit of the shareholders. At the same time, often managers of some fast-growing start-ups are grossly overpaid.
Dudum owns an estimated 15.2% of Hims, valued at around $900M, so he is heavily incentivized to grow the company!
For his work as CEO, in 2020 he was granted 3.25M shares that vested when Hims share price hit $22.99. Additionally, he was granted 1.62M shares that vested when Hims share price reached $38.31. His compensation was around $131M at today’s share price. In 2022, he was awarded an additional 2M shares that have yet to be issued.
Looking at his compensation, while it is high, I find it to be reasonable considering the returns Hims has delivered to shareholders.
However, it seems his compensation is entirely based on the stock price. I would prefer if there were some operational milestones as well, such as subscriber numbers, EPS, FCF, and others.
In 2024, Hims recognized $92.3M in share-based costs (SBC), around 6.3% of revenues. While this is above the average company, it is in line and even much lower than other fast-growing start-ups.
2. Competitors
Hims has built a digital platform that has enabled them to quickly take market share from other Telehealth companies.
According to data from Bloomberg, Hims share of total telehealth customers in the areas it is active has increased from 10.1% in 2020 to 47.5% in 2024, while its share of total sales grew from 6.8% to 47.3%!
Let’s take a look at who Hims competes with and how their business differs!
Hims vs Teladoc
During the pandemic, Teladoc saw the demand for its services explode, with revenues jumping 98% and 86% in 2020 and 2021. Such explosive growth and shameless stock pumping from Cathie Wood sent the stock up over 230%.
Since then, however, flatlining sales and large, continuous losses have caused Teladoc’s stock to fall 98%!
For many investors, Teladoc’s story has become a cautionary tale applied to all investments in telemedicine and digital healthcare companies.
Unlike Hims, Teladoc’s core platform primarily operates within the existing healthcare system through partnerships with insurance companies. Often, patients don’t even know that they are using Teladoc services.
Meanwhile, Hims is building a customer-centric, D2C brand that people know and trust!
Another key difference between the two is that Hims has chosen niches in which it is easier to acquire customers and has higher profit potential.
40% of Teladoc’s revenue comes from Better Health, an online therapy offering. If you are a user of YouTube, you have probably seen Better Health sponsorships everywhere. My understanding is that Better Health’s customer acquisition costs are very high, and retention is low. I don’t see it as a great flagship product, but more as a feature of a platform meant to support the use of other treatments.
Meanwhile, Hims started with dermatology and sexual health. Later, they expanded to treat the hugely promising obesity market, whilst Teledoc is not as large in these niches.
Additionally, Teladoc has a history of large, shareholder-value-destructive acquisitions. The company spent, $18.5B to acquire Livongo, a chronic condition telehealth company. The majority of the acquisition was written off as growth expectations never materialized.
Meanwhile, Hims prefers small bolt-on acquisitions that add functionality and don’t destroy shareholder value.
Overall, Hims has demonstrated to be a better-managed company, with a sounder business model and a concise plan for growth!
Ro (Roman Health)
Ro runs a telehealth platform similar to Hims but with a smaller offering.
In the Bloomberg market share data slide from Hims Investor presentation, we see that Ro’s share of total customers has decreased from 15.1% to 13.5%, whilst the share of total telehealth sales increased from 10.4% to 15.4%.
This can largely be explained by GLP1s. While Ro lost customer share, its heavy focus on GLP1s enabled it to gain a total dollar share, as GLP1s are more expensive than other offerings.
This makes Ro, more exposed to the end of the GLP1 shortage than Hims!
Ro is a private company that is believed to be heavily unprofitable. The company raised $150M in its last funding round in 15. February 2022 at a valuation of $7B. It is improbable that they could get such a valuation in the public markets, so an IPO is unlikely.
Noom
Noom is not a telehealth provider, rather, they are a digital health and wellness company operating in the weight loss niche. Usually, they don’t work with doctors and don’t prescribe medication. Noom focuses on changing habits through support and coaching, but they couldn’t miss the opportunity and started prescribing GLP1s during the shortage.
So, it is not a surprise that they have seen their market share decrease as Hims and other companies have built more effective and sophisticated digital platforms focused on a broad selection of medical treatments.
Curology
Curology is a major player in the D2C dermatology health space.
Despite being older than Hims, the company hasn’t expanded to other conditions and is primarily known for its acne, anti-aging, and skincare treatments.
For this reason, their market customer market share has fallen drastically from 19% to 6.2%, whilst their dollar share has seen a more drastic decline from 30.6% to 11%.
Amazon
Amazon is the $2T technology gorilla disrupting industries left and right.
One of the most feared and dreaded phrases for any corporate CEO is “Amazon is entering your industry” as Amazon eventually dominates most industries it expands to!
In November of 2024, Hims share price fell over 20% in two days when it became clear that this giant has set its sights on the $4.9T US healthcare industry.
Amazon provides health care services through its Amazon One Medical brand, which offers both membership-based and pay-per-visit virtual and in-person care.
Meanwhile, Amazon Pharmacy supports fast and reliable fulfillment of over-the-counter and prescription drugs.
While Amazon is behind Hims, it could quickly catch up as it has many advantages.
Amazon has the largest and most sophisticated logistics network in the US, enabling them to deliver medicines cheaper and faster.
Prime has over 180M members in the US, enabling the company to easily upsell its healthcare offering, reducing customer acquisition costs.
Amazon’s massive scale gives them immense leverage in negotiations with suppliers to demand lower prices.
Lastly, Amazon is able and willing to use its huge profits from other divisions to subsidize new segments! They could offer much lower prices than Hims, as they don’t need the business to be profitable to survive.
In a stark contrast to Hims, Amazon is also actively forging partnerships with established health systems across the US. This means that patients will be able to use their insurance in certain situations.
While Amazon is a formidable competitor, I don’t believe that it will put Hims out of business, as the market is large enough for a few dominant players!
I think the Netflix fight with Prime Video is a great indicator of the likely outcome.
Netflix is the video streaming industry leader, with a great product, strong margins, and 300M+ subscribers.
Prime Video has a massive presence, but it is still unprofitable. To attract subscribers, Amazon is forced to charge lower prices while spending more on content and marketing because Netflix’s offering is just better.
Hims has the advantage of having a singular focus on digital healthcare, similar to Netflix only focusing on delivering a great video streaming experience. Amazon has a hundred other segments, and as the Netflix vs Prime Video example shows, the smaller company can outcompete the larger one with innovation and better customer experience.
3. Moats
Warren Buffett famously said that he prefers companies with a wide moat. While Hims is certainly an innovative and fast-growing company with some defensible characteristics, it is not a wide-moat company. To be fair, we have to remember that Hims is only 8 years old, and no wide moat company was built in such a short time.
Therefore, Hims is a young company still working on building a moat around its castle!
Here are the moats being built:
Brand – For a D2C company, brand recognition and trust are paramount for long-term success, but for Hims as a healthcare company, that is doubly so. While it has built some brand strength over the past 8 years, most people still don’t know this company exists. Hims is changing that with coordinated brand-building efforts, such as the Super Bowl ad.
Customer base – The larger the customer base, the more predictable a subscription business becomes, as satisfied subscribers are less likely to switch. Moreover, a stable customer base lowers customer acquisition costs, leaving more to reinvest in the product. This enables better services, lower prices, and higher margins, increasing Hims competitiveness. While 2M subscribers is certainly a moat, that is not yet at a wide moat level.
Data flywheel – The more data Hims has, the better decisions the company can make. Data helps them answer important questions such as “What conditions have high demand? Which treatments work the best? Which side effects are the most frequent? Etc… Data is especially crucial in AI training. Hims 2.2M subscribers, with their 10.5M orders, generate plenty of data.
Vertical integration – Hims is in the early stages of building a vertically integrated healthcare company that handles patient intake, diagnosis, lab testing, data processing, treatment, observation, and drug delivery, manufacturing, and possibly even drug discovery. While Hims owns some facilities that support improved vertical integration, such as drug pharmacies, testing labs, and compounding pharmacies, it needs to acquire a lot more to become truly vertically integrated.
4. Risks
As an innovator in the large and slow healthcare industry Hims and Her faces many risks to their business!
Let’s analyze some of them!
Regulatory Risks
In the US, there are various federal and state regulatory bodies. The larger the company becomes, the more complex and time-consuming it is to follow all regulations.
Healthcare is possibly the most regulated industry in the world!
All providers of digital healthcare services must be licensed or have permission to operate not only in the state they are incorporated in but also in all states where they have patients. Additionally, each state dictates which services Hims can provide and in what way they are provided. For example, a patient in Nevada must be served by a doctor licensed in Nevada. Additionally, in Nevada, drug prescriptions based on questionnaires are not allowed, whilst in California, it is.
The fact that there are various exemptions makes regulatory compliance even more complicated. If due to a mistake in the patient processing, some of these regulations are violated, Hims could receive large fines and be open to additional oversight from regulators.
Meanwhile, the Federal Drug Administration (FDA) regulates the safety, efficacy, and security of human drugs. With Hims expansion into compounded drug manufacturing, the company is increasingly more involved in the pharmaceutical side of the industry. This exposes Hims to additional regulatory burden, as strict safety standards must be adhered to. The FDA has the power to inspect the facilities at any time, issue recalls of medications, or even shut the facility down if severe issues are discovered.
Failure to comply with regulations could lead to large penalties and reputational damage. Furthermore, changes in regulations might force Hims to alter their business, resulting in increased costs or lower revenues.
Lawsuits
One risk that is most frequently mentioned by Hims skeptics is that “the company is exposing itself to huge lawsuits from clients, FDA, and Big Pharma”. Let’s examine each of them.
Critics argue that Hims has overstated the capabilities of its platform and treatments, thus exposing itself to customer lawsuits. Some analysts are quite critical of the optimistic medical claims that Hims uses in their advertising.
As other possible causes for lawsuits, they mention misdiagnosis, wrong prescriptions, undisclosed side effects, and medical malpractice.
As I mentioned in the GLP1 shortage section, there have been some suggestions that Hims plans to use the personalization loophole to continue manufacturing compounded GLP1 treatments in large quantities. While the FDA allows for personalized compounded medications, a “valid medical justification” is needed.
Now, I am neither a doctor nor a lawyer, so I am not sure where you draw the line, what is valid medical justification, and what isn’t.
But my intuition is that this will ultimately be decided in the courts. Big Pharma, such as Novo Nordisk and Eli Lilly, certainly will spare no expense to fight this, and they are multi-hundred-billion-dollar corporations.
Additionally, the FDA is likely to want to assert its regulatory authority, possibly leading to investigations, injunctions, fines, and lawsuits.
A crucial aspect to take into account is whether Hims is being reckless. The customers and Big Pharma can certainly file their lawsuits, but Hims is only really exposed to large penalties from lawsuits if the company is “guilty”. It is too early to determine that, but I am skeptical of the confident claims of critics.
Customer Churn
Most people only take medicines and visit doctors when an issue arises. Once an issue is relatively solved, they stop taking the medication. I imagine a person could subscribe to Hims for some “boner” pills, skin creams, or birth control and cancel after a few months when the issue has been relatively solved.
So, by the nature of some of the services that Hims provides, they are inherently temporary and have high churn rates!
Unless a patient has a chronic condition that requires constant attendance, they are bound to cancel their Hims subscription.
This is why Hims is very actively trying to expand to treat chronic conditions!
Hims doesn’t disclose customer churn rates, but it is widely believed by many experts and analysts to be very high. An investment firm, Spruce Point Capital, estimates that 50% of all subscribers cancel after one year, and 80% after two years.
Other experts believe that 18% of customers cancel just after 3 months!
For a subscription business, these figures are atrocious and must be improved in the long term.
Another cause for churn is low customer satisfaction. If a medical solution doesn’t deliver the desired outcome, a customer will seek an alternative.
Looking at Hims and Hers reviews, it seems that the company generates polarizing opinions. There are a lot of 5-star and 1-star reviews on Trustpilot, with the Hims brand having an average rating of 3.0 and Hers a 3.3. However, the Apple App Store reviews app rating is much higher, 4.8 for Hims and 4.6 for Hers.
Ro Trustpilot rating is 3.7, Better Health is 4.3, Teladoc 4.7, Noom 3.6, Curlagoy 4.1. Whilst Amazon services One Medical and Pharmacy have terrible reviews of 1.4 and 1.3.
Looking through Hims and Hers reviews, I noticed that the most common praises are convenience, easy-to-use app, privacy, discreet packaging, quick delivery, and effectiveness of the treatment.
Conversely, the most common complaints included poor customer service, slow delivery, billing issues, lack of communication with doctors, and low effectiveness of medication.
Some of these seem contradictory. This probably highly depends on a patient’s location and condition. Customers closer to pharmacies likely receive their drugs faster. Additionally, some conditions are just easier to treat than others, and unhappy customers are more likely to leave reviews than happy customers.
In any case, these customer reviews are unsatisfactory and should be improved to reduce churn!
But we have to look at the churn in the context of the company growing so quickly. Many startups grow faster than their infrastructure allows, causing quality issues.
Hims is addressing high churn by growing the doctor network, adding new conditions, acquiring or partnering with more pharmacies, improving the platform’s tech, and expanding personalized offerings.
Reputation Risk
If customers don’t trust the safety and reliability of a healthcare provider, they will simply not use it.
As Hims grows into a mini pharmaceutical company, the safety and effectiveness of their medications are crucial for attracting new customers and keeping existing ones.
A safety or ethics scandal that involves the Hims platform, medications, or affiliated doctors could severely damage the reputation of the company.
Limitations of Hims Model
As mentioned earlier, the key aspect of the Hims model is that the company doesn’t work with health insurance companies. We have talked about the advantages of this model, but there are certainly limitations.
The US health insurance industry generates approximately $1.7T in revenues, most of which goes to paying for treatments, and Hims is missing out on all of it!
Hims is going after only the out-of-pocket, not insured part of the healthcare industry. According to the Centers for Medicare & Medicaid Services 2023 report, $505.7B were spent by patients on out-of-pocket medical costs, an increase of 7.2% Y/Y. However, that $505.7B includes patient co-pays and other payments to insurance companies.
There is no data to precisely say how big the not-insured private healthcare industry is, but it is likely a fraction of the insured one!
While the TAM for Hims services is still enormous, likely $100B+, the company is still limited by its decision to not work with health insurance companies.
There will be a time when Hims will have exhausted all the “easy” and profitable treatments, and growth will be harder to come by. Now I can’t tell you when that will happen, in 3 years or 23 years, but there will be a moment when Hims will have to rethink its strategy. It could be that at that point, the company will decide to work with insurance companies.
5. Part 3
Thank you for reading this far in my Hims Deep Dive!
Hims analysis will conclude with Part 3, in which I will explore their finances and look at the valuation!
Additionally, one can expect a look at the opportunities that Hims can execute on to grow the business!
Thank you for reading Global Equity Briefing!
Global Equity Briefing is an investing newsletter with a focus on analysing global companies. I have written highly detailed Deep Dives on Nu Bank, Ferrari, Palantir, Grab, Celsius, Mercado Libre and Hello Fresh!
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Brilliant write-up; thanks for sharing, Ray. Looking forward to part three.