Selling Options On Hims & Hers Could Yield 20% Or More

After recommending Hims & Hers HIMS as a 'Strong Buy' from $6, we recently downgraded it due to its stretched valuation. Since then, the stock has dropped over 40%, but we don't yet see it as a clear value proposition at current levels.

HIMS combines two critical elements:
- High lifetime customer value with low churn
- High gross margins (customers generate substantial gross profit)

This combination gives management strategic flexibility with cash deployment. The sticky business model makes sense: customers treating conditions like hair loss or weight management have little incentive to switch providers.

Recent financial results have been impressive:
- Robust YoY revenue growth (~50% expected this year, ~20% for following years)
- EPS turning positive with significant operating leverage
- Potential to reach ~$400M in operating income in the near future

At ~$27.50 per share, HIMS trades at:
- 4.1x sales
- 52x TTM net income
While our bullish projections suggest this multiple could compress to 18-20x within 12-18 months, we'd prefer entry at $18-$20 per share.

Given our outlook, selling put options presents an attractive alternative: Selling the August 15th $18 strike puts:
- Premium: $1.30 per share ($130 per contract)
- Required margin: ~$1,670 per contract
- Yield: 7.7% over 112 days (27.7% annualized)

This strategy offers two favorable outcomes:

If HIMS stays above $18: Keep the premium (27.7% annualized yield)
If HIMS falls below $18: Buy shares at an effective 35% discount from current price (plus premium)

At $18 per share, HIMS would trade at ~36x TTM earnings - a much more attractive entry point.

Risks:
- If HIMS collapses suddenly, put sellers must still purchase at $18
- HIMS remains highly volatile
- Two potential earnings reports during the option period could increase volatility
- Stock could potentially trade into the lower teens

Despite these risks, the risk/reward ratio appears favorable, and we maintain a 'Buy' rating on HIMS.