If you have to think about the answer, you’re not a very good investor in my opinion. That’s because Hims & Hers Health (NYSE:HIMS) plays in a segment of health care that continues to be ripe for growth, while GameStop (NYSE:GME) is a broken company with a possible second act. At current prices, you can buy 13 shares of HIMS stock for a single share of GME.
Admittedly, the two companies do share something in common: they both lose a lot of money. GameStop’s trailing 12-month operating loss is $200 million, while Hims Inc. lost $72 million in fiscal 2019, its most recent fiscal year.
So, why do I feel the telehealth business is the easy answer? Let me count the ways.
Revenues Going Up, Not Down
In the most recent nine months through Sep. 30, 2020, HIMS had sales growth of 85.6%. Meanwhile, GameStop’s revenues in the 39 weeks ended Oct. 31, 2020, fell by 31%.
GameStop supporters will point out that its e-commerce business saw a 257% increase in sales in the third quarter, evidence that its omnichannel business strategy will reap rewards post-Covid-19. Further, the fact that its e-commerce business accounts for 25% of overall sales suggests that profitability is just around the corner.
If you believe that, I’ve got some Florida swampland to sell you. In Q3 2020, GameStop’s gross margins actually fell 320 basis points to 27.5%. In the nine-month period, gross margins fell by 340 basis points to 27.3% from 30.7% a year earlier.
Omnichannel might be helping GameStop’s sales from totally imploding, but they’re not delivering profitability.
At least Hims & Hers can justify its quarterly loss as a cost of grabbing market share in an expanding segment of the healthcare marketplace.
Ryan Cohen Isn’t the Messiah
The co-founder of Chewy (NYSE:CHWY) is said to have made a boatload of unrealized gains on the GameStop stock surge. When GME stock hit $160 on Jan. 25, his 12.9% stake had jumped by 1,700% based on Cohen’s average price paid of $8.43 per share.
As I write this, he’s up 3,100% based on a $273 share price. Given the amount of volume trading each day for GME stock, he could turn those unrealized gains into the real kind fairly easily.
Of course, with three seats on GameStop’s board, he probably doesn’t want to do that.
The problem that I have with Cohen, a so-called “activist” investor through his firm, RC Ventures, is that he never really proved the Chewy concept could work before selling to PetSmart in 2017 for $3.35 billion.
Founded in 2011 by Cohen and Michael Day, the media were gobsmacked by the business’s revenue growth from zero to $900 million in five short years. Impressive stuff.
The PetSmart Acquisition
However, I could never figure out why PetSmart would buy an e-commerce business in the same space. Either it felt Cohen’s business could rectify its own e-commerce weaknesses. Alternatively, its private equity owners had found a reasonably quick way to get itself out from under the $8.7 billion albatross that was the PetSmart acquisition in March 2015.
I believe it was the latter.
Over the course of two years, PetSmart’s owners, including BC Partners and La Caisse de dépôt et placement du Québec, learned a ton about the companion pet industry. They had to know that pet-related businesses would continue to draw significant attention from the investment community.
What’s a $3.4 billion investment when you’re already on the hook for $8.7 billion?
As of May 18, 2020, PetSmart’s owners held 335 million shares of Chewy stock — 84% economic interest and 98% of votes — worth $14.1 billion. Today, those shares are worth $34.2 billion.
So, who’s really the smart one here? I’d say BC Partners and company pulled the wool over Cohen’s head.
Telehealth Industry Continues to Grow
Fortune Business Insights produced a report that suggests the global telehealth industry will see revenues grow 25% per year from $61 billion in 2019 to $560 million in 2027.
The North American market accounts for approximately 43% of the worldwide revenues. If the projections hold up, the North American market could hit $241 billion by 2027, leaving plenty of room for Him & Hers, Teladoc (NYSE:TDOC), and all the other players, current and future.
If you haven’t figured it out by now, digitalization is the next great secular trend, with telehealth being at the top of the list.
InvestorPlace’s Matt McCall recently called HIMS an excellent play on the millennials demographic.
“HIMS has an advantage in its focus on the millennial market. Other telehealth companies are going after all generational cohorts. Conversely, Hims & Hers sees potential building up its market share in this still-young demographic, with the oldest millennials turning 40 this year and the youngest ones at 25 years old,” McCall wrote on Jan. 26.
“In my opinion, the company is smart to pursue this market. As millennials progress in age, they aren’t going to be satisfied with the “old school” healthcare model. So, HIMS stock has the potential to capture the market now and hold onto it in the coming decades.”
You’ll get no argument from me, Matt.
The Bottom Line
We’ll never know if Ryan Cohen’s timing — selling to PetSmart — was lucky or good.
GameStop’s had years to get its act together from an online perspective. Maybe Cohen can pull off GameStop 3.0. Maybe not.
What we do know is that Telehealth is not going away. That doesn’t mean HIMS stock is a slam dunk.
However, I’ll take 13 of its shares of HIMS stock any day over a single GME.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
