The healthcare sector is usually regarded as one of the safest and most stable spaces in the market, which becomes especially important and attractive during volatile periods such as today in the S&P 500 index. However, there is still a preference for the technology sector, and this preference is now being diversified away from the semiconductor industry and into other niches.
One of these niches is found in the healthcare technology space. Stocks like Hims & Hers Health Inc. (NYSE: HIMS) come to shine as they mix the stability of healthcare and the exciting growth often inherent in the technology space. Now that the stock trades at only 68% of its 52-week high, investors looking for value in today’s market might find it in this stock’s current discount.
Recently, Hims & Hers stock has rallied by over 20.3% over the past week alone, a reaction that came after news broke out stating that Hims & Hers had been added to the S&P 600 small-cap index. This addition now requires some of the biggest money managers, like MSCI Inc. (NYSE: MSCI) and Vanguard, to carry a specified amount of this stock in their portfolios, but there’s much more driving the company’s potential upside today.
Hims & Hers Stock Is Already Crowded, But Wall Street Sees Bigger Upside Ahead
With over $300 million in institutional capital already making its way into Hims & Hers stock over the past 12 months, some investors might feel like this company's upside is now capped, but that’s far from the truth. Wall Street analysts lead the way in showing just how much higher the stock could go.
Needham & Co. initiated coverage on Hims & Hers stock last month. This time, they chose to go with a “Buy” rating alongside a $24 share price target. To prove these analysts right, Hims & Hers stock would need to rally by as much as 23.1% from its current level.
This double-digit upside is driven by the company’s fundamentals, which, contrary to popular belief (a belief that drove the stock lower), are not being challenged by Eli Lilly & Co. (NYSE: LLY) and its entrance into the weight loss GLP-1 market.
A few months ago, some had a feeling the stock would become investment grade, and investors can lean on a few institutional buyers coming in to gauge the potential bullishness that awaits Hims & Hers stock in the future.
The Vanguard Group decided to boost its holdings in Hims & Hers stock by 1% over the past quarter, bringing its net investment to $221.4 million today, or 6.7% ownership in the company. Other buyers came from Renaissance Technologies, a quantitative hedge fund operating in momentum strategies. Their recent 113% addition to Hims & Hers stock as of August 2024 raises confidence for the market.
Renaissance’s position is now at $121.9 million, just under 3% ownership, giving markets another reason to consider the stock.
Why Markets Agree Hims & Hers Deserves a Premium for Its Bullish Future
Whenever the market is willing to overpay for a stock, there is typically a good reason behind this behavior. When it comes to Hims & Hers stock, there is a big premium. Investors can see this premium shown in the price-to-book (P/B) ratio of 12.0x for Hims & Hers, which is significantly above the medical sector's average 4.8x P/B valuation.
Hims & Hers' fundamentals and financials essentially justify the premium markets are now paying for the company's underlying equity value. According to the company's latest quarterly earnings report, there was enough growth to justify new analyst ratings for new highs and the premium commanded today.
Revenues reached $315.6 million this quarter, representing an annual jump of 52%. Driving these jumps in the top line were the 43% year-over-year growth in subscribers, who are now up to 1.9 million. The subscription model adds another layer of safety and predictability for Hims & Hers on top of its healthcare nature, making it more attractive.
While the company is still too young to report a steady net earnings per share (EPS) profit, there are other metrics investors can look into to define the potential earnings power of Hims & Hers. Operating cash flows rose from $26.3 million last year to $79.4 million this year to show markets why this stock can quickly become a target for investors.
The fact that Hims & Hers is a digital business (on top of a subscription business) enables it to report over 81% in gross margins. The nature of the company's profits acts as one of the major tailwinds to compounding the stock's valuation, and now that it has been added to a major index, there may be a new wave of investors looking to get into this growth story.
