June 14, 2024

Hims & Hers Health Vs Monday.com & SentinelOne

In today's brief, we will examine the interesting profitability expectations and enterprise value dynamics associated with Hims & Hers Health vs Monday.com & SentinelOne

The market has struggled to properly price all three businesses over the last three years, trading them in fairly wild and erratic fashion in each year they've been public so far.

We can see this reality in the chart below:

The Enterprise Values Of Monday.com, Hims & Hers Health, and SentinelOne

As we can see, in 2021, Monday.com and SentinelOne were valued at vastly, vastly higher enterprise values (market cap less net cash or net debt). The valuation gaps were staggering in that period.

At one point in 2022, Hims traded at about 2x enterprise value to 2025 EBITDA estimate, as something of an aside that illustrates the aforementioned "fairly wild and erratic" trading dynamics of these companies.

Today, however, Hims is now valued at a higher enterprise value than SentinelOne, and its enterprise value gap with Monday.com has closed in dramatic fashion.

The closing of this gap can be directly attributed to Hims' increasing profitability estimates, which you may review below:

2025 EBITDA Estimates (Rough Proxy For Free Cash Flow; Must Deduct About 25% From Each To Arrive At Free Cash Flow)

We can see another view of Hims' rapidly expanding EBITDA in one of its investor presentation slides:

While we can't be entirely sure what the future will bring, it's worth noting the likely terminal free cash flow margins for each of these businesses.

In the case of Monday.com, it has guided to "margins that resemble those of Atlassian (TEAM) at maturity," i.e., about 35% long run free cash flow margins.

In the case of S1, we will likely witness the same as it matures in the decade ahead.

In the case of Hims & Hers Health, its margins will very likely be lower, and the company has explicitly guided in the fashion. To wit:

With these margin guardrails in mind, it's understandable that the market would price Hims at a discount to Monday.com and S1; however, to price these businesses on their margins alone would be misguided. A narrow consideration of margins is not sufficient for understanding the value of an equity, and our four point framework for equity value communicates this reality:

  1. Amount of free cash flow per share
  2. The growth rate of that free cash flow per share
  3. The durability of that free cash flow per share
  4. Your next best alternative, e.g., the risk free rate (treasury bonds)

Moreover, it's worth considering the competitive positioning for each of these businesses. While Monday.com holds a very small fraction of the overall productivity software market globally, and while S1 holds a very small fraction of the $220B, and growing, global cybersecurity market, Hims dominates in its digital healthcare niche in the U.S, and that dominance has been increasing.

So it's entirely conceivable for Hims to grow its free cash flow at a higher rate for longer than Monday.com and S1 via: 

  1. Continued market share gains in the industry in which Hims dominates
  2. Continued margin expansion to the levels to which Hims has guided
  3. Continued growth in line with its growing market, i.e., telehealth or digital healthcare (further market share capture unnecessary through this lens)
U.S. telehealth market size and growth rate, 2024 - 2030

The central question, however, remains:

What is the answer to point three of equity value for Hims?

How durable is its free cash flow generation through an economic cycle?

We can be relatively certain as to the answer to this question for Monday.com and S1, as they operate tried and true businesses models.

Hims, on the other hand, operates a fairly unprecedented business model.

That said, if it continues its torrid growth rate, expansion of market share, and expansion of free cash flow margins, the market may look past this question as Hims reaches scale that makes the question less relevant, at least when looking at Hims' EV through the lens of a comparison of its EV with the EVs of Monday.com and S1 (the question will always be relevant).

To close, the goal of this exercise was to provide data to you.

At the end of the day, LAS has rated all three of these businesses buys, and we're totally happy to continue partnering for the long term.

Here's why (and to close):

  1. Each business operates from its greatest position of strength in its corporate history. Period. The future is uncertain but this is the patent and indisputable reality today.
  2. Each business has a massive (genuinely) cash hoard alongside $0 in debt.
  3. Each business generates free cash flow.
  4. Each business fits within the first and third foundational investment frameworks.
  5. Each business has successfully launched new products, serving to sustain their hypergrowth rates, expand their runways for growth, and create greater business durability.

"The contribution from emerging solutions was a record in Q1, growing to about 40% of our bookings. Over time, our platform solutions will be an even more significant part of our business, driving diversity and long-term growth."

Tomer Weingarten, CEO, Q1 2024 SentinelOne Earnings Call

It will be certainly interesting to monitor the progress and evolution of these companies and their shifting values in the years ahead.

Read More