Constellation Software (CSU) is currently trading almost 50% below its all-time high. This is the first time ever the stock has dropped this hard.

The irony is remarkable. Constellation buys software companies. Lower valuations mean better deals. The market punishes the stock while the fundamental business actually benefits from it.

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The Business Model: It’s The Data, Stupid

Adapting Bill Clinton’s historic saying, “It’s the economy, stupid,” we can use this to start the article.

Constellation Software acquires vertical-market software (VMS) companies: specialized software for specific niches such as municipal administration, hospital systems, utilities, and billing. These aren’t sexy products, but they’re absolutely essential for the organizations that use them. But at the same time, very important, the cost of the software is usually less than 1% of the budget and many of the customers don’t have to pay this themselves (government-paid).

What Constellation truly owns are the data of people, money and government bodies. CSU truly owns are systems of record: the authoritative source for money, people, or regulated data. This is fundamentally different from a point solution that sends emails, draws dashboards on top of someone else’s data, or can work from publicly available data that was used to train LLMs.

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The AI Threat: Hype vs. Reality

The narrative goes that AI and “vibe coding” will commoditize all software. This is a fundamental misconception. AI commoditizes code, not the data. CSU’s moat doesn’t consist of the difficulty of writing code. Everyone who thinks that (and they seem to be the majority) doesn’t understand Constellation Software.

The transition from on-prem to cloud was much easier from a security and compliance point of view. And still, most of these software programs are still on-prem. Why? Security, ecosystem, switching costs, conservatism (a good attitude in administration, to a certain point), etc.

The data that was compiled over the years in those systems can’t be simply migrated. This is a painful process that takes years and it would cost a huge amount of money and time to migrate. And to what? A system that has not proven itself and is not trained on the data? To a system that doesn’t have the necessary certificates and regulatory approvals.

But suppose you are a real innovator in the administration and you take the risk. The auditors, regulators and other people with authority will miss the boards, interface and metrics they know. So, you will be an easier target for them.

But suppose you dodge that bullet, there are tens of thousands, probably hundreds of thousands of integrations that need to be solved. Tax authorities, banks, regulators, public services, insurance brokers, police forces, firefighters, etc. And you can’t solve that easily with AI.

If there’s just one integration that doesn’t work, your carreer is at risk. Would you take that much risk if you could just keep using the software you have been using for a few decades? I don’t think so.

Vibe coding makes it cheap to build an application, but that’s only 5% of a company’s value. The rest is in convincing customers, integration, stability, security, etc.

The narrative that “every company will build its own solution with AI agents” underestimates the non-coding tasks. It’s easy to build a product now, but it’s hard to execute. Most of the customers of the companies Constellation has, don’t even have the teams and/or the willingness to do this.

Some say: “But cheaper competitors will come.” Well, same thing. To code, everything will be cheaper indeed because you can code much faster now. But that’s 5% of the work. Going from a product to a company is much harder than making a product.

The problems that VMS software solves for customers are compliance, security, reliability, data management, reporting, etc. It’s not cost. The cost is very low compared to the budget, as said. As long as the software works, very few will want to migrate.

And AI can also be a boost to the company. AI capabilites like copilots, AI search, deeper insights etc can be used by the CSU companies as premium products on top of the existing stack.

Management Transition

Mark Leonard is stepping back as CEO and this is the second bearish take you hear. But his successor, Mark Miller, was an executive at the very first company Leonard acquired. He’s literally been there from the beginning of Constellation as COO. The COO role at a serial acquirer is crucial: he’s responsible for full execution, integration, and advising acquired companies.

Leonard was visionary because he decentralized the company from the start. Managers at the underlying levels can decide on acquisitions up to a certain size within their domain. They’re taught the Constellation method. This is the most decentralized company I know, even more so than Berkshire Hathaway.

Valuation

CSU currently trades around 12x forward EV/EBITDA. This is the lowest valuation in at least the last decade.

The market overreacts in both directions. Before the selloff, many software stocks were priced as if the sky was the limit. Now all names are being punished, regardless of fundamentals. Constellation was expensive as well, at 24x forward EV/EBITDA, because “it only goes up.”

Let’s zoom out a bit more. Since its IPO, Constellation Software has delivered a CAGR of 16.5% at the current price, while revenue grew by almost 20% per year. That means that there is a disconnect between the two right now and unless M&A really falls off a cliff (very unlikely), the stock is undervalued now.

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Conclusion

Why doesn’t AI commoditize Constellation Software? Because its moat isn't in the programming. Whoever says that doesn’t understand the business. It’s about the deep entrenchment of the software, about reliability, compliance, regulation, integration, etc. AI will be an extension, not a threat.

The product isn’t the hardest part and never was. The hardest part remains finding customers, getting them to pay more, and hooking them into your ecosystem. Many forget that now. If you are a patient long-term investor, this is your opportunity.

Feel free to ask additional questions in the comments!

In the meantime, keep growing!

Disclaimer: I have a position in Constellation Software and I have used this crash to make it bigger.

You may or may not have seen it, but The Trade Desk (TTD) released its earnings yesterday.

The stock crashed by about 30% after the market and it's down even more after multiple downgrades from analysts today. It's now down about 38%.

I know this creates uncertainty for many Multis and that's why I wanted to be fast with this analysis. So, I already analyzed yesterday (after my HIMS article) and then set my alarm clock early this morning. Because I know you want to know: What really happened here? Is it an opportunity or a trap?

Let's have a quick look at the numbers first.

The Numbers

• Revenue: +19% YoY to $694M, a beat by $8M

• Operating Margin: 17% (+1pp YoY)

• Adjusted EBITDA: $271M, 39% margin (-2pp YoY but +1pp vs. guidance)

• Non-GAAP EPS: $0.41, a beat by $0.01

• Customer Retention: >95% for 11 consecutive years

• Channel Mix: CTV 47.5%, Mobile 35%, Display 12.5%, Audio 5%

• Geographic Split: North America 86%, International 14%

• Operating Cash Flow: $165M (+103% YoY), FCF $117M (+106% YoY)

• Cash Position: $1.7B with no long-term debt

• Guidance: Q3 revenue "at least" $717M (+14% YoY); Adj EBITDA ~$277M

The Trade Desk delivered a solid quarter with a beat on revenue and EPS. While the beats were small, they were still beats. But the stock cratered 30% in after-hours trading, as we saw, and it continued to drop further today. This was not a repeat of their Q4 2024 quarter, though. Then the company missed its own guidance and Jeff Green plainly said they messed up. This was a fundamentally solid quarter that beat both revenue, EPS and EBITDA expectations, albeit slightly. There were good reasons for that, as you’ll see later in this article.

While some point at the guidance as the culprit ('just 14%), I want to point out that the guidance still beats the consensus. Just a little bit, again, but still. Don't forget that 2024 was an election year and that The Trade Desk usually sees mid-single-digit extra revenue from elections, often combined with slightly higher margins.

The growth deceleration from 25% in Q1 to 19% in Q2 may appear concerning, but again, this was expected. Large global advertisers, which are TTD's customers, faced significant tariff-related uncertainty starting in April. That temporarily pressured spending in the auto and CPG (consumer packaged goods) sectors. Even former Vice President of the USA, Mike Pence, shared this:

This is just one example. Tariffs are real and hurt the economy. That's not a political statement, just an objective observation. Multiple Fortune 500 companies are dealing with real margin pressures from trade policies. The issue is not a structural shift away from programmatic advertising, let that be clear.

Over the mid-term to long-term, though, the macro uncertainty actually plays into The Trade Desk's strengths, as we have seen in the past. When advertisers face uncertainty, they demand more agility, transparency, and measurable performance. That's exactly what programmatic advertising can deliver. As CEO Jeff Green noted, "programmatic is almost anti-cyclical" because volatile environments historically accelerate the shift toward data-driven advertising.

The 14% Q3 guidance looks disappointing, but the political advertising comparisons fall away next year, and the operational improvements the company implied should also start to pay off then.

More Insights From The Call

The Trade Desk had some problems with switching customers to its new Kokai AI platform. But Q1 saw a turnaround there and that continued in Q2. Kokai now fuels 75% of platform spend with 100% adoption still expected by the end of the year. The performance improvements are strong. Samsung achieved 43% better audience targeting, while Cashrewards saw a 73% improvement in cost per acquisition. It's good that TTD shares these numbers.

Most importantly, clients who've shifted the majority of their spend to Kokai are increasing their total platform spend 20% faster than those who don't. This proves Kokai drives incremental budget allocation. That's the holy grail of platform upgrades, of course.

The AI integration across forecasting, campaign optimization, and supply path optimization is finally using what Green calls "one of the most underappreciated data assets on the Internet." TTD processes as many transactions in 30 seconds as Visa and Mastercard combined do in a year. So, you bet they have a ton of data.

That quality data feeding AI creates real competitive advantages that compound over time. No doubt about that.

Deal Desk, launching in beta as Kokai's final component, addresses one of programmatic's biggest pain points by using AI forecasting to rescue underperforming deals and present better alternatives. Disney's early adoption provides meaningful validation. The House of Mouse has committed to shifting 75% of its ad revenue to programmatic by 2027, and Deal Desk will help them achieve that goal.

OpenPath continues gaining traction, now handling a "material" portion of TTD spend while delivering impressive publisher results. The New York Post saw a 97% programmatic display revenue growth, while Hearst Newspapers achieved a 4x fill-rate improvement.

The Sincera acquisition is already starting to work out through OpenSincera. It provides free supply chain transparency data to the entire industry. Publishers are using this data to improve their ad experiences, which creates better inventory for TTD's clients.

Things haven't changed. The Trade Desk is still the largest source of third-party demand for many publishers worldwide. That's a powerful position to be in.

The Amazon Competition Issue

If you have followed The Trade Desk over the last year or so, you must have heard "Amazon is eating their lunch."

Yesterday again, when I posted on X about the results, this was a reaction.

Green's extensive commentary on Amazon told another story. Of course, you think, he has to. But it was brought with confidence and insight. Amazon's DSP faces inherent conflicts of interest: they own Prime Video inventory and compete directly with many of TTD's largest clients in retail, CPG, and cloud services.

Amazon's recent doubling of Prime Video inventory actually weakens its objectivity pitch to major brands. TTD competes with only a small portion of Amazon DSP spend that doesn't go to Amazon-owned inventory. Founder and CEO Jeff Green on the conference call:

Amazon is not a competitor, and Google really isn't much of a competitor anymore either. We're trying to buy the open Internet, leveraging technology that values media objectively. We don't have any media, and we don't grade our own homework.

In my opinion, and to me, all the data suggests that we're right on this, despite their mixed messages, they are not trying to buy the open Internet objectively. They can't. They have way too much Prime Video supply to sell to ever honestly pitch large brands to objectively buy the open Internet. They push sponsored listings most and Prime Video after that. Neither of those compete with us, which is why I say that we're not really trying to compete with Amazon. When they argue that their DSP, which is not even their top advertising priority, let alone the core of their business, when they argue that, that's objective to the biggest advertisers in the world, I believe they weaken the rest of their advertising pitch, and they weaken the strength of their AWS pitch.

Green even suggested a future partnership with Amazon:

I think Amazon is more of a potential partner, honestly, than it is a long-term competitor. If Amazon opens Prime Video to external demand, which I believe they should, we believe we'd be an amazing partner to drive demand to them, and it wouldn't surprise us if that were to eventually be the course that they choose to take.

This is not just wishful thinking. Jeff Green has predicted many things in the past that sounded like wishful thinking. He has been spot-on every single time. It's deep industry knowledge combined with pattern recognition.

Don't forget that Jeff Green founded AdECN in 2003, which was the first demand-side ad exchange and one of the earliest true programmatic advertising platforms. Everyone thought Green was crazy when he predicted Netflix would embrace advertising and work with independent platforms but they did. Everyone laughed when he said Google could not depreciate third-party cookies in the planned time. But Google first postponed a few years and then didn't depreciate third-party cookies at all.

I think Jeff Green could be right about this one too. Amazon doesn't want to be in the firing line of regulators, and opening up their DSP would definitely help there.

But back to The Trade Desk. Its concentration on large global advertisers creates quarterly volatility but also long-term advantages. When tariffs hit auto and CPG companies, TTD feels it immediately. But when macro conditions stabilize, these same relationships drive disproportionate growth. That's why the slowdown (also caused by the election year 2024, don't forget that) doesn't worry me too much.

The joint business plan ('JBP') pipeline shows promise and it's a drag at the same time. There are nearly 100 JBPs in progress, with active JBPs at record highs and spending growth exceeding 20% year-over-year. These are multi-year partnerships with the world's largest brands. That impacts the short-term growth a bit, as longer contracts usually have lower revenue per year, but these kinds of relationships create sustainable business.

International growth continues outpacing North America, while it's still just 14% of The Trade Desk's revenue. Nearly 2/3 of ad spending is outside of the US, though, which shows what a long runway The Trade Desk still has.

Retail Media and CTV Expansion Accelerating

CTV remains The Trade Desk's fastest-growing channel at 47.5% of revenue. It has partnerships with Disney, Roku, Walmart, and Netflix, just to name a few. The shift toward streaming continues creating massive addressable market expansion, particularly in live sports where the Trade Desk can target key moments like overtime in NBA games.

Retail media partnerships with Instacart, Home Depot, and Walmart, for example, give The Trade Desk granular consumer purchase data. That allows the company to measure the returns of ad campaigns very precisely. Only Amazon has that as well, but not from others, only from its own sales. The Trade Desk's independence allows it to use those retail data in advertiser campaigns to boost returns and get even more insights.

These partnerships create network effects that strengthen over time: more retailers provide better data, which improves campaign performance, which attracts more advertisers, which provides more value to retail partners.

Adjusted EBITDA margins held steady at 39% despite 23% operating expense growth, higher than revenue growth. CFO Laura Schenkein, in her last earnings call for The Trade Desk (see later), says about the rising operating expenses:

During the quarter, we continued to make investments in our team and platform, particularly in areas like platform operations as the AI and machine learning tools embedded in Kokai continue to drive greater campaign performance.

In other words, the margin compression versus last year reflects deliberate investments in future growth capabilities. As a long-term investor, I'm never against those kinds of investments.

The CFO leaving

A few days before the earnings call, The Trade Desk had quietly filed a document at the SEC (Securities and Exchange Commission) in which it announced the replacement of its CFO, Laura Schenkein, by Alex Kayyal. I had not seen that filing.

Although Schenken worked at The Trade Desk for over a decade, she was TTD's CFO for just two years, and to be honest, she never made a strong impression on me. Kayyal brings deep adtech experience as an early TTD investor (since 2014), a TTD Board Member and M&A expertise from Lightspeed Ventures. That's a global venture fund capital fund with $29 billion. Until about a year and a half ago, he was the Senior Vice President of Salesforce Ventures. So, that could lead to more acquisitions for The Trade Desk.

Source

Jeff Green about Alex Kayyal:

I'm thrilled that he's agreed to join our leadership team as I believe there are a few in our industry who have Alex's experience and strategic mindset in finance in a way that incents and drives growth for the organization.

Schenkein didn't sound bitter at all on the conference call, rather grateful. I think she may realize that the CFO role may at the TTD may not be the best fit for her talents. As a CFO, you have to pound the table sometimes, opposing the CEO if necessary and I'm not sure she could do that. Maybe she was too kind.

With Alex Kayyal, that won't be the case, I'm sure. I've seen many executives in a role that doesn't suit them. They can still do OK work, but never excel. I'm just speculating here, of course, but it could be that was the case here.

There was also a new Board addition, Omar Tawakol. He founded BlueKai in 2007 (acquired by Oracle) and Rembrand, a creative AI leader.

Green also addressed the proposed extension of the dual-class share structure that was filed recently. These are his words to defend this:

From the day that Trade Desk was founded, we believe that long-term thinking is our greatest advantage. The vision that we described is a long-term North Star that we think about in nearly every major decision we make. Dual class helps maintain that long-term North Star orientation. When we went public in 2016, we chose a dual-class structure because we knew building something transformative, something that could truly redefine the open Internet would require conviction, patience and freedom from the short-term pressures that weigh on public companies or are the one-size-fits-all approach often promoted by some governance analysts and major proxy advisory firms.

Our belief has proven correct. Since then, we've grown from below a $1 billion market cap to about $40 billion today and included in the S&P 500. We've helped shape the future of identity with UID2, built leadership in CTV and retail media, expanded globally and invested in innovations like Kokai, Sincera and our TV operating system, all of which require decisions that didn't pay off in a quarter or even a year, but instead positioned us to lead for years to come.

We're now at another inflection point. The digital advertising landscape is evolving rapidly with ongoing regulatory scrutiny of walled gardens, the rise of AI and growing demand for transparency and independence. We believe the next decade will be pivotal in determining the winners and losers in our space and that staying true to our long-term vision is more important now than ever. This proposed extension isn't about entrenchment. It's about ensuring that the founder-led strategy that got us here can continue to guide us forward.

Green's track record speaks for itself, I think, so I have no problems with this extension. Long-term thinking has been TTD's greatest competitive advantage. It prevents an activist from coming in to squeeze out short-term profits. I'm a long-term shareholder myself and that's also how I like management to think.

2026 Acceleration Thesis Intact

Management believes there will be a growth acceleration in 2026.

The operational improvements implemented after the problems in Q4 2024 are working. The company restructured the engineering teams, separated marketing functions, and invested in leadership. There is already better execution.

The competitive landscape continues improving, Jeff Green argues:

As Google continues to pull away from the open Internet, that creates a vacuum which we're stepping into. Stepping back, it's more of a buyer's market than it's ever been before. Large publishers need partners like The Trade Desk to win. And as Google and Facebook have largely abandoned the open Internet, The Trade Desk is the largest source of third-party demand for many publishers around the world.

With full adoption of Kokai, better execution after the Q4 rearrangements and potentially big partners who can recover from the tariffs, 2026 might look better for The Trade Desk.

Bearish Sentiment

If a stock drops so much on an earnings result, you get extremely emotional reactions from investors as well. I know this will be a surprise for many, but even analysts are people. ;-) So, the Bank of America analyst downgraded the stock from Buy to Underperform, cutting his target price from $130 to $55.

Source

Slowing growth? This was foreseen. In their estimates, mind you.

TTD's fundamental advantages have not suddenly disappeared. To the contrary, the contracts get longer and bigger.

The enterprise customers, especially from the automotive industry, see pressure from the tariffs, as I showed earlier. It's the second-biggest category.

From the Q2 earnings slides

But this volatility will become an advantage. These businesses get so much better returns on their ad dollars with programmatic advertising and value the insights they get.

It's as I have seen so often before: the price action defines the story that's told. The multiple analyst downgrades are nothing more than that too. I saw it when Adyen crashed 40%, too. The analysts see the after-market reaction and want to come up with a story to explain the drop.

This time, it was easy, of course. Just say slowing growth and Amazon and there you have it. Being out with a note before the markets open is much more important than a deep analysis. I've been doing this for 10 years now and you just can't make a deep analysis so fast.

So, what do you do as an analyst? You read the headlines, listen to the confernece call at 2x speed, read some comments from colleagues and there you go. Of course, the price target, that ridiculous habit, has to be slashed. If you leave it at $130, like that BofA analyst, you are probably fired if the stock tanks further to, let's say, $40. If it goes up to $100 from here, nobody will be angry with you and you just raise your price target again. It's a ridiculous game, and it's even more ridiculous so many people believe it's real.

Conclusion

Up to now, I see no reason why The Trade Desk should be sold. Yes, revenue growth was slower and guidance too, but that was fully expected, with tough comps from political ads in 2024, especially in Q3 and Q4, of course, and the impact of the tariffs from big customers.

You will get another article from me soon, with updates on the Selling Rules, the Quality Score, and the valuation for The Trade Desk, but I wanted to share my interpretation of this article before the market closes.

I don't advise going all-in, but I think the sentiment is already way too bearish now. As always, this could even go further and the stock could drop more, but then I will simply add again. I see no fundamental change to the thesis, just a lot of noise as a result of the huge price drop.

In the meantime, keep growing!

I hope you didn't need a telehealth doctor because of the big drop in the stock price of Hims & Hers (HIMS) this week.

I can't seem to be able to find the source anymore but I recently read that Hims & Hers is the most volatile stock of all stocks that trade on the American stock market with a market cap higher than $1 billion. This was not the first big move and it won't be the last.

But of course, with volatility, you should always wonder if the market is right or just reacts like a fish to bait.

That's what this article is meant for.

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What happened?

Yesterday, Novo Nordisk (NVO) announced that it will stop its partnership with Hims & Hers for the Wegovy weight loss drug. That partnership only lasted for about a month. This is a part of the press release Hims & Hers used to announce the partnership at the time.

I highlighted a few crucial elements here.

The first is long-term collaboration. Looking back, that's totally wrong, of course. But it was meant to be that. Then there's the announcement that there will be direct access through NovoCare to Wegovy "as a first step." Keep that in mind for later.

The last paragraph says explicitly that Hims & Hers will continue doing what it does and that Novo Nordisk and Hims & Hers will work together for this.

The fact that the partnership blows up, surprises me less than the collaboration, to be honest. The speed at which it untangled does.

Novo Nordisk isn’t happy that Hims & Hers is exploiting a loophole. If the patient can’t tolerate the official dosages, they’re allowed to use a magistral (compounded) formulation. Hims & Hers does this quite often, and Novo Nordisk sees that as an infringement of their patents.

Novo said they stopped the partnership due to concerns about the telehealth company’s sales and promotion of cheaper knock-offs of the weight loss drug Wegovy.'

This was the headline.

The text was very hard (my bold):

Over one month into the collaboration, Hims & Hers Health, Inc. has failed to adhere to the law which prohibits mass sales of compounded drugs under the false guise of "personalization" and are disseminating deceptive marketing that put patient safety at risk.

(...)

when companies engage in illegal sham compounding that jeopardizes the health of Americans, we will continue to take action.

Based on Novo Nordisk's investigation, the "semaglutide" active pharmaceutical ingredients that are in the knock-off drugs sold by telehealth entities and compounding pharmacies are manufactured by foreign suppliers in China.

(...)

The report also found that a "large share of [these Chinese suppliers] were never inspected by FDA, and many of those that were [inspected] had drug quality assurance violations." US patients should not be exposed to knock-off drugs made with unsafe and illicit foreign ingredients.

That's pretty blistering criticism.

Hims & Hers reacted with this statement from founder and CEO Andrew Dudum.

Putting This In A Broader Context

As a (potential) Hims & Hers investor, the Novo Nordisk allegations probably seem pretty scary.

That's why I waited a bit to make sure I had all the information available for a nuanced view. Quality information and time to distill insights from the information are crucial in such a context. I see so many just spitting out an opinion without real insight. It's based on emotion. The opinions go from "Hims & Hers is doomed" over "a typical fight between an incumbent and an innovator" to "Hims & Hers should sue Novo Nordisk for defamation."

Let's be clear upfront. Hims & Hers is a clear disruptor and those very often seek the edges of what is allowed and what isn't. I'm not even discussing that.

It's an obvious risk, of course, but it's also what sets apart disruptors from the rest. It's a thin line. If you know the history of investing, you know that many of the companies that disrupted industries broke the law or had questionable moral behavior at times.

For example, multiple anonymous Amazon executives reported that they placed ghost orders from their own warehouses to secure that the competition could not get the best transportation at an affordable price. Once they had secured that, they canceled the orders.

This is Mark Zuckerberg:

And boy, things did break with Facebook's Cambridge Analytica scandal.

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Uber was illegal in many cities for a long time. Uber used a fake version of its app to fool regulators. When officials in cities where Uber wasn't legal tried to order rides, they saw fake cars and fake wait times. This helped Uber avoid getting caught by authorities. The company was faced with hundreds of lawsuits for various forms of misconduct.

For more than two years, Doordash collected the tips of its Dashers illegally to make the company a little less money-bleeding.

Airbnb is another example. As if their core product wasn't already controversial enough, they went beyond that and expanded into non-residential areas.

In 2011–12, Google inserted invisible JavaScript into its ad tags to trick Safari into treating third-party cookies as first-party to bypass Safari's block on cross-site tracking.

The Saint of Tech, Steve Jobs, launched his first product with Steve Wozniak: the Blue Box. It was a machine to hack the telephone network. Not very legal.

I could go on, but you get the point. Innovators want to move fast and use all possible ways that are legal, even if that means walking that thin line between legality and illegality and sometimes tripping over it.

Back to Hims & Hers. There are loopholes in the drug rules and Hims & Hers is using that loophole. Under Section 503A of the Federal Food, Drug and Cosmetic act, it is allowed to use compounding for personalization. There are all sorts of reasons why this can be done: the dose is not fit for the patient, the patient has an allergy, a certain element of the drug interacts with other medications the patient takes, etc.

One of the reasons compounding is allowed deserves a bit more attention: if there's a shortage of the drug. That was the case for Wegovy. Novo Nordisk could not make enough Wegovy for the huge demand. That shortage status was stopped by the FDA earlier this year and in May, compounding for shortage reasons was terminated.

Eli Lilly and Novo Nordisk were very frustrated by the shortage status, as the compounded versions ate into their margins and their patent was temporarily powerless in that sense. It's essential to understand this to understand Novo's reaction.

Why Did This Happen?

There's never a single reason why such things happen.

The context I just described, the frustration of Novo Nordisk about the FDA granting the exception of compounded drugs because of the shortage, is definitely one element. Novo knows that the American market is by far the most profitable.

Hims & Hers grew fast with its compounded GLP-1 and probably that caught Novo Nordisk's attention. For them, it was simple: Hims & Hers could not produce any semaglutide anymore and it made sense to partner with Hims & Hers for the distribution of Wegovy.

Let me rehash two key passages from the press release here.

Remember, this press release was from Hims & Hers.

I think these passages suggest that Hims & Hers saw the collaboration as a way to continue what it did, but with the support of Novo Nordisk. In other words, it wanted to be in the driver's seat. I think it wanted, so to speak, Novo Nordisk to make a 'compounded' version for them. In the meantime, it could continue with the compounded formulas if necessary, until Novo had a good alternative that was not their general Wegovy drug.

The results on Hims & Hers are better because of the platform. Hims & Hers reports that its integrated, on-platform approach leads to better adherence, lower discontinuation rates, and improved patient-reported outcomes compared to industry averages.

For example, only 13% of Hims&Hers' GLP-1 customers discontinued within the first month, compared to a 30% discontinuation rate reported in a Blue Cross study for commercially available options.

Hims & Hers attributes this success to its ability to personalize dosing, manage side effects, and provide comprehensive support.

In other words, Hims & Hers is confident about its approach and I think Novo Nordisk completely misjudged that.

Novo Nordisk went in with other expectations. They probably saw Hims & Hers as a distribution platform for their Wegovy. Partnering with Hims & Hers would make it easier to stop H&H from using the loophole for compounding. Seeing that this didn't happen and Hims & Hers continued to use the loophole made it furious. The press release is written from that point of view. It kicks around wildly, trying to paint Hims & Hers as a scammy company.

The message Andrew Dudum sent out to defend Hims & Hers was also as expected: it paints Novo Nordisk as a part of the Big Pharma complex that bullies independent companies like Hims & Hers that only care about the patient.

The truth? Probably, it's somewhere in between.

Lawsuit Incoming?

My initial reaction to this was that this was the first step for a big lawsuit that Novo would use to try to prevent Hims & Hers to use compounded semaglutide.

However, here you see the value of thinking things through before publishing an article. While initially, I thought the chances were 90% or higher, I'm not that convinced anymore.

There are at least three reasons to believe Novo Nordisk will not sue Hims & Hers.

1. Suppose Novo Nordisk sues Hims & Hers and the judge affirms that Hims & Hers acts within the law, which I still think is likely, it would be a total disaster for Novo Nordisk. It would be a green light for all other platforms like Ro and others to follow in HIMS' footsteps. After all, the judge said it was OK, right? Now those other platforms are worried about their reputation and lawsuits. Losing would mean a disaster for Novo Nordisk.

2. The prescriptions, and therefore the decision about whether the patient needs a personalized version of semaglutide or not, is not made by Hims & Hers. Dozens of independent doctors prescribe these personalized drugs. They evaluate the patients and use their professional judgement. They have medical licenses and they know they can lose these if they don't act properly.

This first layer already makes it hard to claim that Hims & Hers is responsible. Unless Novo Nordisk can produce a smoking gun, such as an internal document that instructs doctors to prescribe as much compounded semaglutide as possible, it's not easy to prove that Hims & Hers is responsible for what Novo Nordisk believes is the excessive prescription of personalized medicine instead of their generally available Wegovy.

3. On top of that, there is another layer. Hims & Hers also doesn't produce or even distribute the compounded semaglutide. They use a network of compounding pharmacies to service the personalized semaglutide prescriptions.

So, any lawsuit would have to prove with hard evidence that Hims & Hers is the spider in the web of doctors and compounding pharmacists.

That doesn't mean there can't be a lawsuit. Novo Nordisk could use a lawsuit to try further to damage Hims & Hers' reputation. But after wild allegations and a lot of media fuss, I also suspect that it would be eager to settle the case.

Hims & Hers would probably use a lawsuit as a marketing opportunity and profile itself as the David vs. Goliath, the small but righteous party fighting for the people against the evil giant.

In that context, I came across an interesting poll.

As you can see, I voted for 'take the fight' because if Hims & Hers really wants to be a disruptor, it has to do disruptive things like this.

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Reputation Damage?

I hear many professional stock analysts talk about 'the reputation damage' Hims & Hers is having now, but I don't believe that. There's a saying in marketing: "There's no such thing as bad publicity." It means that even if you are in the news negatively, there's often a positive effect on sales because your name is more well-known.

Now, of course, in healthcare, reputation is of utmost importance. However, it's not as if poison has been found in Hims & Hers' products. The fact that the compounded drugs come from China may sound scary to the general public, and that's definitely Novo's intention, but it is common practice for drugs in the US.

China is only responsible for about 6% of the drugs in the US, but that's only if you look at the finished dosages. When examining Active Pharmaceutical Ingredients ('APIs'), which are used to manufacture drugs, China holds a 17% market share of imported APIs in the US. But that's not all.

Most generic drugs are made in India. Where do they source their APIs from? You guessed it, predominantly China. Estimates suggest about 80% of APIs used in India are Chinese.

For certain products, China's market share is extremely high. Approximately 95% of Ibuprofen comes from China (either directly or indirectly, through India), for example.

Making it appear scammy that products come from China is just a dirty marketing tactic from Novo Nordisk. Many of the drugs Americans take come from China. You can discuss if that's a good thing, but that's another discussion. Here, I just wanted to add context to Novo's claim.

As for the accusation of illegality of the loophole, there could be some truth there, but as I argued before, it won't be easy to accuse Hims & Hers of this. You would have to sue all prescribing doctors and prove that Hims & Hers forced them to prescribe as much personalized medicines as they possibly can. Not so simple.

Hims & Hers keeps claiming that it is fully compliant with the law.

Adding Fuel To The Fire

A Bloomberg article shared news that makes the situation even more interesting. It reports that California will stop reimbursing Medicaid for weight-loss drugs.

This is in HIMS' advantage and puts extra pressure on Novo Nordisk. If the semaglutide is not reimbursed, you can as well buy it on Hims & Hers, where the distribution is much easier.

Financial Impact?

Some worry about the financial impact. I think it will be limited because the partnership was so short. It was only announced on April 29, which is already in Q2, so I don't think it will have been included in the guidance.

This is guidance management projected.

Fiscal.ai

This is what Yemi Okupe said about this guidance:

Embedded in our outlook are a few key assumptions that reflect the intentional evolution of our platform and how we're setting ourselves up for long-term success.

First, we expect continued strong growth across many of our most tenured offerings, including mental health as well as men's and women's dermatology, all of which are benefiting from years of investment in brand retention and personalized offerings.

That said, while sequential and year-over-year growth is expected to continue, we do expect uneven trends in sexual health as we navigate transitions in the treatment mix, which we believe is temporary as new daily personalized solutions gain traction. We're already starting to see encouraging signs of momentum that we believe will strengthen with the addition of new offerings over the course of the year.

Second, we expect to complete the transition of subscribers previously on commercially available doses of semiglutide to either appropriate alternatives on our platform or other platforms entirely by the end of the second quarter.

This transition is expected to result in a one-time quarter-over-quarter revenue drop in the second quarter, from which we are confident we can continue to build upon through the remainder of the year.

Third, we expect gross margins to expand in the second quarter. Based on the information that we see today, our expectation is that operational efficiency gains and growth from more tenured specialties can offset potential headwinds from macroeconomic factors such as tariffs.

Do you see anything that would be changed here? I don't. Management already knew that compounded semaglutide because of the shortage was ended by the FDA and reflected that in its commentary and guidance.

So, I expect Hims & Hers to still post similar YoY growth. Suppose (suppose!) there would be a miss, I don't care too much. If that miss is not gigantic, I don't care too much. I'm not in Hims & Hers for the short term, but for the long term. With solid growth in non-GLP-1 (+30%) and the expansion into Europe with the ZAVA acquisition, I don't see the long-term investment case hurt.

This is how I feel about Hims & Hers.

So, Is HIMS A BUY, HOLD, Or SELL Now?

I understand the fear. The Novo Nordisk press release sounds pretty scary, doesn't it? But sometimes, the best opportunities come at a time of peak fear.

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