People can and should consider what Wall Street analysts say about a stock. After all, these analysts are the professionals of the investing world and are compensated very well for their research and opinions.
But that doesn't mean that they're always right. In fact, it looks like they may have made a jaw-dropping mistake with Hims & Hers Health(NYSE: HIMS), an up-and-coming telehealth company that doesn't have the mainstream attention bigger companies have.
The evidence overwhelmingly points to the company making a massive leap in 2024; analysts don't seem to realize it yet. Here is why this glaring error could be your investment opportunity for 2024.
What are analysts getting wrong?
Hims & Hers is a digital platform where patients can consult doctors about various health conditions. It started with taboo topics like sexual health and hair loss but has expanded as it grew, entering heart health and weight loss in 2023. The company has only been around since 2017, and it's reinvesting its profits to keep growing. Management spent a whopping $320 million on marketing over the first nine months of 2023 -- more than half of the revenue it brought in.
In that light, it probably shouldn't be a surprise that analysts aren't expecting the business to make any money. According to consensus estimates, Hims & Hers Health will lose $0.06 per share in 2024. While the stock market rallied in 2023, investors aren't as receptive to unprofitable companies as they were in 2021.
Hims & Hers stock is still down more than 60% from the high it achieved two years ago. But this narrative that Hims & Hers won't soon be profitable looks pretty flawed, and the hard evidence backs up this theory.
The evidence -- straight from the charts and the CEO's mouth
It's plain to see that Hims & Hers is getting closer to turning a profit as the company grows. Revenue has grown by leaps and bounds over the past three years, and virtually every financial metric has improved since the summer of 2022.
HIMS Revenue (TTM) data by YCharts
Revenue is growing faster than expenses, so all these lines are trending up. No, net income (bottom-line earnings) isn't positive, but free cash flow is, and gross profit margin has even improved to a lofty 81%. Given the positive trends, positive net income seems like a matter of time at this point.
According to comments by CEO Andrew Dudum, that will come far sooner than analysts expect. Dudum commented in the company's third-quarter earnings call that GAAP profits will arrive within the first half of 2024. But what really punctuated this was the following comment: "Accelerating momentum could bring attainment of this milestone as early as the fourth quarter of 2023."
You must sometimes take management claims and comments with a grain of salt. However, Hims and Hers Health has under-promised and over-delivered ever since the stock went public. The company routinely raises its quarterly guidance. So, when this management team states that profitability could be months away, it goes a long way.
Get it while the getting is good... and it's really good
Given management's optimism, analysts' estimated 2024 losses seem equally pessimistic. If the company delivers profits by early 2024, Wall Street could scramble to grapple with an entirely new story around the stock. That might mean hefty investment returns for a stock that's still trading at a fraction of its former high, from two years ago when the company was far smaller than it is today.
Since Hims & Hers Health isn't profitable, investors can look at revenue to illustrate how far the valuation has fallen. Today, the stock trades at a price-to-sales ratio (P/S) of just over 2. Such a low valuation implies that the company's revenue barely grows or carries low margins. Of course, in this case, neither is true. Hims & Hers has increased revenue by 50% year over year these past four quarters. Profit margins are over 81%.
HIMS PS Ratio (Forward) data by YCharts
Now, I can't begin to tell you the stock's upside in 2024. Nobody knows the company's actual earnings or how the market will respond. The best I can do is tell you that the numbers and evidence point to a massive misalignment between Wall Street's expectations and what can happen.
That signals that shares could go higher, not lower, once the market sees Hims & Hers differently. This potential setup makes the stock one of my favorite ideas for the New Year.
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Justin Pope has positions in Hims & Hers Health. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
