Hims and Hers Health Inc. (HIMS) produced sterling results on Feb. 24, spurring huge interest in HIMS call options trading. Barchart reported an unusual volume today in HIMS call options that expire on March 14.
HIMS is trading at $44.27 in morning trading on Wednesday, Feb. 26, up 11%. This was the result of huge investor interest in this $10 billion market cap company which sells GLP weight-loss compounds, and other telehealth-based products.
As a result, the Barchart Unusual Stock Options Activity Report showed that over 1,000 call option contracts were traded at the $43.00 strike price for expiration on March 14.
That was over 10x the prior number of outstanding contracts in this particle call option tranche.
The investor interest in this call option has pushed the midpoint premium to $3.93 per call contract. That implies that in the next 16 days, the call option buyers hope to see HIMS stock rise to $46.93 or higher, in order for this call option to eventually have any intrinsic value.
In other words, they want to see HIMS stock rise by 6.39% (i.e., $46.93/$44.11 price today) or higher in the next two weeks. That could be possible if the stock continues on its upward trajectory.
On the other hand, the short-sellers of this particular call option tranche can make an immediate yield of 8.39% (i.e., $3.70 bid / $44.11). That is a very good two-week short sale yield for any investor who buys 100 shares for $4,411 and then sells these calls to make $370 per call contract shorted.
Let's see what is driving the enthusiasm in HIMS stock.
Strong Revenue and Free Cash Flow (FCF)
Hims and Hers Health said its Q4 revenue rose 95% YoY and its full-year sales (mostly subscriptions) were up +69% YoY. Apart from its weight-loss product subscriptions, the company's sales were up 43% YoY.
More importantly, the company is now solidly profitable on a free cash flow (FCF) basis. It reported that FCF was $59.5 million in Q4, up from $10.8 last year.
That represented a solid FCF margin of 12.36 of its Q4 sales of $481.1 million. For the full year, its $198 million in FCF was 13.4% of its $1.477 billion in sales.
That implies that the company's future sales growth could bring in huge increases in FCF. For example, analysts now project $2.32 billion in sales this year and $2.66 billion in 2026.
That means that on a run-rate basis, its next 12 months (NTM) revenue could average $2.49 billion. Here is what that implies for FCF:
13% FCF margin x $2.49 b NTM sales = $323.7 million FCF
Price Targets for HIMS Stock
As a result, using a 2.0% FCF yield metric (i.e., 50x FCF multiple), the stock could potentially reach $16.18 billion:
$323.7 million x 50 = $16,185 million = $16.18 billon
$16.185/ $9.877 billion mkt cap today = 1.639 = +63.9% higher market value
That means that a solid price target is $72.29 per share
Analysts agree. For example, AnaChart.com reports that Maria Ripps of Canaccord raised her price target from $63.40 to $68 per share after the company reported its earnings.
The bottom line is that investors are keen on HIMS stock because of its strong earnings and FCF results. That could be why there is such huge interest today in these call options in HIMS stock.
