Why Hims & Hers Stock Could Be a Multi-Bagger in the Making

Key Points

• Hims & Hers stock keeps giving investors more reasons to buy, and has all the right factors to turn it into a potential multi-bagger investment.
• Financial growth and strong fundamentals act in a way that could trigger a massive capital rotation.
• A scenario of a $3.5 billion short squeeze still stands, a probable outcome to bring on higher prices.

It’s not often that investors come across the kind of companies that can yield a multi-bagger investment over the years. Still, today, there is one name that possesses all the right components (and timing) to make it a suitable investment for those seeking to compound their wealth in the coming years. This company is popular among value investors and in the retail investment community, giving it the exposure and momentum it needs.

There is also a macroeconomic component behind this company, as uncertainty around inflation and geopolitics tends to drive investment capital into a specific type of business model. Typically, this rotation creates a preference for names that not only generate stable and predictable cash flows but also offer a product (or service) that is relatively immune to economic cycles and recessions.

Combining the growth and excitement of the technology sector and its development with the underlying stability of the medical sector, shares of Hims & Hers Health Inc. NYSE: HIMS have become one of the most obvious targets for delivering the sort of growth that can multiply an investment over and over again.

73% Margins, 2.4M Subs: Hims & Hers Stock Has Room to Run

As most seasoned investors know, a story without numbers is only a fairy tale, and numbers without a story are just a spreadsheet. In the case of Hims & Hers, the story and the numbers align to convey a common theme to investors. That theme leads to nothing but upside potential for the company's future.

Examining the most recent quarterly earnings results, these two factors begin to emerge. Revenue, for example, reached an all-time high of $586 million, representing an annual growth rate of up to 111% compared to the same quarter in the previous year.

Of course, revenue alone is only a vanity measure; there are other metrics that really can tell the story. Investors can take note of subscriber growth in this case, which clocked in at 38% over the past year, reaching up to 2.4 million users. Now, considering that Hims & Hers services are mostly subscription-based, this is where the real benefits start to show up.

Gross profit margins are typically a sign of strong (or weak) pricing power and market share, and a 73% margin tells investors all they need to know. Hims & Hers is an industry leader, and its business model allows for much more growth down the line.

The net benefit in this mix is the free cash flow, where a $50.1 million figure shows investors a nearly fivefold increase compared to the $11.9 million for the same quarter last year. Free cash flow can serve as a proxy for net earnings, and given that the stock price tends to follow earnings growth, this metric lays the foundation for this stock's potential to become a multi-bagger.

Is Hims & Hers Stock Overbought or Just Heating Up?

While all of this sounds bullish enough, investors may be wondering whether these figures are now reflected in the Hims & Hers stock price, especially after a year-to-date performance of up to 166.6%. However, this is the first time in five years that the company has shown any sort of upside momentum like this.

Delayed gratification can be the theme in this case, considering that the business has been growing at a breakneck pace over the past half-decade. Yet, the stock has remained in a tight channel ever since. This new breakout could be only the beginning, as the inevitable popularity of Hims & Hers starts to take hold and is reflected in the stock’s performance now.

In fact, over the past month, up to 2.3% of the stock’s short interest declined despite the uncertainty and volatility seen in the broader S&P 500 index, a clear sign of bearish capitulation, indicating that even these macro events may not be enough to bring the stock lower.

More than that, Hims & Hers still reports that up to 33.9% of its share float is now held in short positions. For those unfamiliar with this metric, it is nearly three times as large as the normal short float, meaning that any further upside moves could essentially trigger a “short squeeze.”

Short squeezes happen when short sellers are pushed to the edge and forced to close down their positions (which involves buying the stock), thus creating more buying pressure and higher prices. After a nearly 200% annual performance, Hims & Hers could be about to trigger a $3.5 billion rotation out of these shorts, turning them into buyers.

The final vote from the markets came in the stock’s valuation metrics. It now trades at a 93.4x price-to-earnings (P/E) ratio, indicating a significant premium to the rest of the medical sector. Some might call this overbought, while others will recall that the market is always willing to overpay for names it believes can greatly outperform.