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This Growth Stock Could 10x in 10 Years

Motley Fool - Wed Nov 29, 2023

The stock market averages about 10 percent annual returns over the long term. If you wanted a stock to increase by 10X over 10 years, that would require an average annual return of 26%. Clearly, beating the stock market isn't easy. Stocks that do it generally must have a combination of stellar growth and a cheap valuation, which creates a launchpad for years of life-changing gains.

Healthcare company Hims & Hers Health(NYSE: HIMS) has grown impressively, and trades at prices you might call a bargain today. Here is why the stock could rise 10X over the next decade.

Rapid growth with room for more

Hims & Hers is a digital healthcare company. Patients can meet with professional care providers on the company's website or smartphone app, receive prescriptions, buy over-the-counter products, and have them shipped to their home -- all within the company's platform. The company started with taboo categories like sexual health and hair loss, but has expanded to others like cardiovascular health and weight loss.

The business model is proving remarkably popular. Annual sales have exploded, increasing more than six-fold in under three years. Gross margins are almost 80%, enabling the business to generate free cash flow despite investing in revenue growth. The company is spending half its revenue on marketing.

HIMS Revenue (TTM) Chart

HIMS Revenue (TTM) data by YCharts

Eventually, management can ease off its marketing budget to boost profits. For now, there is still room to continue on this growth-focused path. Hims & Hers has just 1.4 million subscribers, which is a tiny fraction of adults in America and the rest of the world. Growth rates could slow as the numbers get bigger, but there could be years of double-digit revenue growth as new categories and customer markets come online.

Wall Street is underestimating the stock

Stock prices can sometimes be irrational, and it's difficult to understand why Hims & Hers currently trades where it does. The company is being valued at just two times its revenue despite that revenue coming at such high gross margins. Being a healthcare company isn't as flashy as tech stocks like Palantir, which has a price-to-sales ratio that is 10 times higher but is growing slower and at lower gross margins.

Sure, the company isn't technically GAAP profitable, but the business is creating free cash flow, and management believes it can turn GAAP profitable as soon as next quarter. Somehow, Wall Street analysts still estimate 2025 to be the company's first profitable year.

HIMS PS Ratio Chart

HIMS PS Ratio data by YCharts

The math behind 10X returns

Given management's optimism, Wall Street experts seem to underestimate Hims & Hers. The company's excellent performance has profits poised to soar, and Wall Street still hasn't given the stock enough credit. This type of situation is how 10X stocks are made. It's time to go to the numbers to give this thought more substance.

If the company hits management's $873 million revenue guidance for the full year, Hims & Hers will grow sales by 65% over the $527 million it did last year. Hims & Hers will do $5.4 billion in annual revenue a decade from now if it can average 20% growth for the next decade. That seems realistic considering its rapid growth today.

Over-the-counter healthcare products.

Image source: Getty Images

By then, Hims & Hers should be more mature and profitable. Marketing is the company's largest expense, which should decrease compared to revenue as the business grows. Remember, half of the revenue is currently going to marketing. Ideally, management can slowly reduce that percentage to 25% of revenue or less.

If that happens, a net profit margin of 15% seems very reasonable. In other words, the company keeps $0.15 of each sales dollar after the cost of products, marketing, overhead, taxes, etc.

A business earning 15% on $5.4 billion in sales would have net profits of $810 million. Even if you valued that company at a price-to-earnings ratio (P/E) of 20, roughly what the S&P 500 trades at today, that's a market cap of over $16 billion, or roughly a 10X increase from its current value.

Nothing is guaranteed, but Hims & Hers could fall notably short of these projections and still produce strong investment returns over the next 10 years. Would you be mad if the stock returned 15% annually instead? Of course not; that's probably still beating the market.

It's all there for investors. The company just needs to keep doing what it's done since going public -- executing.

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Justin Pope has positions in Hims & Hers Health. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

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