During WW2, the Allies were making great progress against the Axis powers by the end of summer in 1944. To speed up the advance, General Montgomery of the 21st British Army Group proposed to Eisenhower (supreme allied commander) a battle plan that would shock the German army in northern Europe. Believed to be made up of old men and kids, the Allies would secure key bridges in the Netherlands along the Rhine and wait for the British and American armored divisions to rendezvous with the Allied paratroopers and create a path to attack northern Germany.

This was called, “Operation Market Garden.”

This all seemed good on paper but there were flaws. The German army in the Netherlands was not made up of “old men and kids” and were in fact, well trained and well equipped.

Bogged down by intensive fighting, the Allied armor divisions could not punch through fast enough to regroup with the Allied paratroopers which had already secured the bridges and dug in to be reinforced.

Outgunned and outmanned, the paratroopers eventually surrendered to the German army, and the operation failed to meet its key objective of securing the Rhine crossing at Arnhem.

Out of the 41,000 paratroopers deployed, between 6,000 and 13,000 were killed or wounded (14% - 31%) and an unknown total were captured and the Allies didn’t successfully take the Rhine until 7 months later in April of 1945.

This was portrayed in the classic movie, “A Bridge Too Far” with Sean Connery.

The reason we bring this up is that this is what we believe is the case with HIMS. The company had great plans for its GLP-1 weight loss offering by capitalizing on the shortage and offering compounded versions to fill the void.

However, the company’s ambitions are too great and while they think they are prepared for what’s about to happen, their views on being able to continue compounding will end up becoming their bridge too far which will result in failed primary objectives and unnecessary losses for shareholders.

Below we’ll go into the background context and the case we’re making for why we’ve turned bearish short-term.

As some of you may know, we extensively covered Hims and Hers Health (HIMS) in 2024 with 8 separate reports/mentions.

We won’t highlight all our research but you can find them using our table of contents here and our most recent earnings update below.

The short story is that we’re bullish on telehealth and the cash-pay model that aims to disrupt the current hellish American healthcare system. This has always been a no-brainer for us as a thematic investment.

However, along the way, as I’m sure you know, there has been quite a lot of volatility (both positive and negative) over the last six months. Headline moves in this stock can send it +/-10% in a single day which has made it a trader’s paradise.

We’ve sat through painful 40% drawdowns and reassured our paid investors via our research that the ship was still sound but don’t expect the waves to subside any time soon. This has benefitted us greatly as up until the FOMC meeting, the position in the portfolio was up >100% in ~7 months. We navigated the recent FDA decision and explained why we couldn’t sell when it blew past $30/share.

The problem we’ve been mulling over the last six months is when the shortage will end which will effectively curtail HIMS ability to sell compounded GLP-1s significantly. We’ve pounded the desk consistently since August when Andrew (CEO) said they’ll continue to sell compounded even after the shortage is over. 🚩

It’s a matter of ‘when’ not ‘if’ this happens and if the recent FDA decision on Tirzepatide highlights anything, it’s that the end is closer than we thought back in November.

We’ve thought long and hard about how to handle this risk going forward. In our Q4 letter, we highlighted that we were still long the shares but bought additional protection on the name. This net long exposure effectively would offset losses on the initial drop but would most certainly still lead to a negative unrealized loss for 2025 but keep intact our path to long-term capital gains tax basis.

As part of our investing journey, we’ve learned the hard way of prioritizing a tax strategy over realizing gains when presented and we’ve concluded that our initial strategy does not fit into how CGC risk management should be handled.

As of this morning, we’ve flipped from a net long position to shorting HIMS.

Below, we’ll explain our reasoning, the new developments with ad policy, and the scenarios that will affect the company's value, just as we have in the past.

First thing first, we want to establish that we’re bullish on the business of HIMS but we’re bearish on the price that the market is currently assigning it.

As a reminder, let’s start with what we’ve been saying are risks associated with this name.

It’s no secret that Semaglutide being in shortage has greatly benefited the company by being able to sell compounded versions of the drug at a higher margin and faster velocity than a company could with branded options.

This is where the first, and biggest risk comes from.

We think that the overhanging risk of at least a 20% pullback on the FDA breaking news regarding Semaglutide coming off shortage is too great to just hold the stock.

The 20% move in our opinion is a reasonable move considering when Amazon broke the news it was launching a competing service to HIMS back on November 14th, the stock was down 25% on the day and ended 30% down after two days.

This was after, in our opinion, news that didn’t mean much besides just another “Amazon” effect fear.

However, we’ve also highlighted the impact that the shift from compounded drugs to branded drugs would have on the HIMS business.

This shift, as we’ve said before slows down sales, limits TAM, and worsens gross margins. So much so that Citi finally came out Friday and downgraded the stock labeling this as a risk to why they’re cutting GLP-1 expectations to $135 million from $400 million for FY’25.

We feel this is a justified and rational call that has been aligned with our views as well.

But while this will be a sudden drop, there’s more that’s at play which will effect HIMS ability to grow their weight loss subscribers.

Facebook and Instagram have been lucrative paid advertising channels for the company, especially as they push their compounded GLP-1 weight loss drug offerings.

The new problem here is Meta’s advertising changes will directly affect HIMS ability to operate efficiently in this space going forward.

Here’s what this means in a nutshell: Advertisers can no longer use certain health, financial, and political affiliation data collected by Meta for ad targeting purposes.

Because healthcare advertisers — like HIMS — will no longer be able to use certain types of health-related data for targeting purposes, such as whether a user completed an online purchase of a prescription drug or product intended to treat a certain condition.

With limited purchase data on hand, ad campaigns running on Meta’s platforms will be less targeted, and likely less effective.

This could include spreading ad budgets across a broader set of platforms or other digital channels to more effectively reach their target audiences which could mean that customer acquisition costs (CAC) rise faster before the company can figure out the new order of things.

You might have remembered that we’ve previously called out HIMS rising marketing costs in relation to net subscribers added as a trend that is continuing to get worse.

If the advertising changes to make it more difficult for HIMS to effectively target new patients, we could see headwinds with operating margins as sales and marketing find their new footing.

If we base this assumption on potential marketing impacts using our math above, it would seem directionally correct since the annual total marketing spend to net subscribers added in FY’21 was $562 vs $898 in FY’23 (+60%). This is in comparison to ARPU of $468 and $548 (+17%) over the same period.

While it’s safe to assume a lot of the paid advertising is on paid search (i.e. Google), we can, and should, be concerned with social media channels when it comes to future marketing efficiency.

Now with these two points, let’s talk about financial impacts.

As a reference, the below model is what we sent out to you all on November 5th.

Sales and price estimates were slightly improved from the prior quarter but at the time, the upside of ~28% seemed realistic and reasonable on ~$2 billion in sales for FY’25.

However, things have changed in regards to the shortage and advertising changes and we need to take that into account.

If we factor in a drop in GLP-1 revenue, H2 weighted because once the decision comes down, 503b pharmacies will have 90 days to comply. Our “base case” could see just over $2 billion in revenue factoring this in.

However, margins will be worse considering HIMS will not be able to make the drug despite many thinking they will be able to under the 503a exemption (we covered this in our Icarus post).

While we do forecast out to 2028, it’s important to note that newly launched verticals (we assume HRT as Andrew has suggested in 2025) throughout this time will still help with overall growth but leave questions on LT margins.

For this exercise, we want to emphasize FY’25 since this is the nearest brick wall investors will hit given the above.

While we do highlight a bull case, we’re going to stick with the base for our analysis as this seems the most likely. We believe this will cover the company’s GLP-1 decline and increased expenses for sales and marketing given the new Meta changes.

For napkin math, at today’s levels of NTM EV/EBITDA assumptions of 25.0x (LTM avg. with 3% annual dilution) on $266 million of adjusted EBITDA which would constitute a flat stock return given Friday’s closing price.

If we zoom out to 2028E adjusted EBITDA of $627 million (17% margins) on 25.0x fwd EV/EBITDA we get to a ~$56/share price, or a 22.0% CAGR.

Interesting, but better opportunities out there with less volatility if that’s what you’re trying to prioritize.

Despite the above 2028 assumptions, once we factor in a 20% drop in prices — which again, we think would be just the initial drop — this would give an estimated 2028 return of >175% or 29.1% CAGR.

Long story short, it starts to get really interesting after the FDA decision comes in.

While we question if the upside at current levels is worth it given the risks, we do need to consider a few things.

For the record, the number of shares shorted jumped from 42.9 million on 12/13 to 52.1 million as of 12/31 (+21%), representing ~30% of the float currently.

Something to keep in mind.

As always, we appreciate your support of our work. If you have any questions, please make sure to message or comment below. If you think others would benefit from the research/commentary we release, we would greatly appreciate you sharing.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm