The best time to invest in a SPAC is when a business combination has been announced and is in the process of being approved by investors. The volatility that comes along with that period tends to provide a good entry price. Unlike in the IPO, at this stage the target is known and there is information to do proprietary research. The stock tends to drift since there is no Street research there is uncertainty on whether the deal will close, creating an opportunity. If the deal doesn’t close, the deal is unwound and cash in the trust is returned (minus some frictional costs). If it goes well, and the target is a solid and unique company, the return can be meaningful.
We point VIC readers towards OAC, Oaktree Acquisition Corp, a SPAC formed by Oaktree Capital. In July 2019, OAC raised 17.5mm units at $10/unit, which also includes a warrant at a ⅓ of an ordinary share. On October 1, 2020, OAC merged with Hims & Hers (Hims), a multi-telehealth platform. OAC evaluated 300 companies, performed deep due diligence on 40 companies and ended up merging with Hims. Currently, OAC’s stock is trading at $10.10, a 1% above the IPO price.
Investors can invest in OAC today and would have their cash in a trust for a short period of time until investors approve the deal. If the deal doesn’t go through, investors will receive their initial investment of $10/share with some frictional costs. At $10.10 (or 1% from the IPO price) there is very little risk for someone investing today. An investor can also invest in the warrants, which now trade separately but with very little liquidity (we don’t go into the warrants in this write up).
The upside could be significant. Hims is an exciting opportunity in the future of telemedicine and on-line pharmacy. Companies in the telemedicine space have had significant market cap appreciation. TDOC has a $27bn market cap and the stock is up 123% YTD. GDRX has a $19bn market cap and the stock is up 48% since its September IPO.
We believe Hims’ current market cap of $1.6bn ($334 net cash) could be worth $2.3bn by 2022 if there is no multiple expansion (10x 2022 Revenues) or $3.5bn at the average of telemedicine multiples. I’d add that, at Hims growth rate and profitability, the revenue used for 2022 may be conservative.
Hims is an integrated digital health provider. Customers can speak to a certified doctor about a number of health issues such as hair loss, erectile dysfunction, dermatology, anxiety, sleep loss, etc., get a prescription and have it delivered to their doorstep, all from an easy-to-use digital platform. Unlike other sites that target only men, hair loss or ED, Hims is expanding to more areas in medicine. While Hims is a B2C it is also creating partnerships with established health systems, providing B2B opportunities that enhance the B2C offering (i.e. provide establish health systems a telemedicine platform and Hims gets better doctor access).
Key Investment Factors on Hims:
Long-Term Growth Potential: Hims started in 2018 and closed the year with $27mm in revenues. The company expected 2020 to close the year with revenues of $138mm, which would result in a 128% CAGR. However, their 3Q20 results show Hims’ revenues are growing faster than they expected. At their current rate, 2020 revenues could be closer to $160mm.
This is all very early days. Hims expects 30% CAGR over the next 2-3 years without including new categories the company is expanding into. As an example, Hims core products are hair loss and ED. Those markets are a $3bn and a $4bn TAM each. But new areas like anxiety and depression, and dermatology are much bigger at $14bn and $44bn TAM respectively. On products specific for women we can highlight their roll out of fertility and menopause. As a result, the chances for Hims to grow 30% for longer is possible. If Hims and Hers is able to roll out all the products they have delineated they could be attacking a $500bn TAM.
Attractive Economics: Hims gross margins reached 76% in its latest 3Q20 report. That is markedly better than its 54% at YE 2019. It is also much higher than the 71% gross margin expectations for YE 2020 Hims presented to investors at the announcement of the deal. Hims economics are profitable and predictable as over 90% of customers subscribe to Hims to get better pricing for their long-term hair loss, dermatologic or sexual health treatment. Hims expects to be EBITDA positive by 2022, but that was based on numbers that so far the company seems to be exceeding.
Valuation: Hims is one of a handful of telemedicine companies that have been trading at high multiples given their growth, potential profitability and large market cap/total addressable market ratio. Hims will be a $1.6bn market cap, a fraction of the TAM of any of its core product lines, plus there are new product and international market opportunities. Hims is not “cheap” by traditional valuation measurements but its growth is at or above the level of other companies like Livongo (bought by TDOC) and GoodRx. Based on an EV/Revenues metric, Hims trades at a 9x 2021 (revenues likely to beat expectations) vs. TDOC at 17x 2021 and GDRX at 27x 2021.
Management: We give a premium to founder-led companies and are impressed with the founder and CEO, Andrew Dudum. He dropped out of Wharton to build a Sequoia-backed company that he sold to Telefonica. Andrew co-founded Atomic, a venture builder company with the backing of Thiel and Marc Andreessen.
Worth noting that management and current investors, including Maverick and Founders, are rolling over almost the entirety of their position in their company. Current shareholders and management will own 84% of the company after closing. OAC shareholders would own only 12%.
Conclusion: We recognize that this is not a typical pitch in VIC, but we believe this is a value opportunity as an investor has limited risk at this stage of the SPAC and has a huge potential payoff if the deal closes and investors start focusing on the businesses’ potential. Risk 1% above the IPO price and a 2-3x if the market appreciates the potential in this business. We’ve been involved in several SPACs that have worked out this way. This SPAC has one of the most credible sponsors and Hims has serious backers like Maverick and Founders.
Risk: As successful short sellers of traditional pharmacy chains, we believe in this company’s potential, especially among Millennials. The key risk would be Amazon entering the space, although this may not be a short term event. The other mitigation could be the need to build a network of certified doctors like the one Hims continues to build.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.