June 26, 2024

An Attractive Setup In Stocks, Part 2

Authored by Louis Stevens

I recently published a Brief entitled, "An Attractive Setup In Stocks," and I would encourage you to read that before continuing today, as today's Brief builds on the information presented therein.

The setup illustrated therein is undoubtedly one of the most attractive setups in stocks.

As the Brief above conveyed, buying a business that has a stable, profitable, and, hopefully, still growing, legacy business, atop of which it's layering on a new, more dynamic, and rapidly growing business can create some of the most successful outcomes in investing, while, importantly, preventing catastrophic loss of capital.

In the Brief linked above, I shared a few examples of successful attractive setups from the past, e.g., Apple (legacy hardware, atop of which software has grown), Amazon (legacy ecom, atop of which AWS, or software, has grown), and Sea Ltd. (legacy gaming/Garena, atop of which ecom has grown).

These have all been quintessential "Attractive Setups," and, in the case of Sea Ltd., I think we will see future instances in which it layers on new, rapidly growing, and profitable lines of business that will serve to accelerate growth for the company (specifically, the growth of free cash flow per share over time, which, as we know, is the basis of all equity value).

In fact, I've been highlighting that Fulfillment By Shopee could be one such example, as it follows in the footsteps of Amazon's FBA business (referred to as Third Party Seller's Services in its 10-Q), which currently generates about $130B in profitable sales.

In the Brief linked above, I noted that virtually all of the businesses L.A. Stevens shares with you fit within this Attractive Setup paradigm, and this paradigm loosely aligns with the first and third foundational investment frameworks that LAS employs to select companies to highlight and share with its subscribers.

Hims, while riskier, in that its legacy business is not a decade+ old and battle tested through economic cycles, certainly is an attractive setup.

Hims' first products were taboo medications, such as erectile dysfunction and hair loss medications, that it sold to men over the internet (to save them the embarrassment of telling their doctor their... well, you know... wasn't working). As these businesses matured and produced healthy gross profits for the company, it layered on new products and brands, such as dermatology for men, as well as a host of products for women via its somewhat recently launched female brand, Hers, which has been a smashing success and will likely be larger than the original, profitable original line of business!

Keep this Hers experience in mind, as it may be foreshadowing for Hims' next lines of business, which we will discuss in a moment.

These new products, in perfect accordance with the Attractive Setup framework, have served to accelerate Hims' growth of free cash flow per share, taking it to new heights in recent quarters.

Hims Stock Price & Hims Free Cash Flow Per Share

  • Note: As we often discuss, share prices follow the growth of free cash flow per share.
  • The value of any business-related equity =
    • The amount of free cash flow per share
    • The growth thereof
    • The durability thereof
    • An investor's next best alternative; for public equities, this is the risk free rate, i.e., the 6 month, 2 year, 10 year treasury yields

Hims is interesting to me today, and possibly more interesting than it's ever been to me, because it now does have a more durable and diversified, multi-product business (I will publish a Brief detailing the value of going multi-product in the future, so be sure to subscribe for free to get that).

Hims went from ED and hair loss meds for men to:

  • Dermatology, ED, hair loss, mental health, sexual health broadly, and more for men
  • And! these products (sans ED) and more for women via its Hers brand

Hims' Expanding Portfolio Of Products, Which Serve To Make The Business More Durable And Serve To Extend The Business' Runway For Growth

Q1'24 Hims & Hers Health Investor Presentation

So, through the lens of the Attractive Setup framework, Hims operates a durable, profitable legacy business, atop of which there's prospects for layering on new, rapidly growing businesses that serve to accelerate the above-illustrated growth of free cash flow per share, and it has done just this in recent quarters; most notably, through its launch of a weight loss product, and, more specifically, a GLP-1 product.

"The Hims & Hers platform is built on the belief that there is no one-size-fits-all approach to health and wellness treatments. Medical providers need a broad spectrum of solutions to address the needs of customers and that includes those with weight challenges. The current Hims & Hers Weight Loss offering is tracking to eclipse $100M in revenue by the end of 20251, as previously discussed, growing faster than any speciality in the company’s history. Building on that success, offering access to compounded GLP-1s gives medical providers and customers consistent and affordable access to effective, trusted and safe medications."

Hims Investor Relations

As we covered in our original review of Hims' GLP-1 product (which you may read here), the opportunity for growth is massive for this product.

Even if Hims were to capture just 1M GLP-1 subscribers (out of a TAM of 180M) at an average of $1,200/year, it would add more revenue than its entire current total revenue.

And, very notably, because Hims fits within both L.A. Stevens' first and third foundational investment frameworks, there's still likely a healthy and long runway for adding new, rapidly growing products well into the future.

Indeed, Hims represents An Attractive Setup.

Read More