Hims & Hers Health(NYSE: HIMS) stock has been on a bit of a rollercoaster ride this year. The stock is down about 35% from the highs it hit earlier this year, but is it still up over 85% year to date. As such, investors should probably expect some volatility when investing in the stock.
Let's look at three things investors should consider when contemplating an investment in Hims & Hers and whether the stock is ultimately a buy, sell, or hold at current levels.
Strong revenue and profitability growth
Hims & Hers has quietly been one of the strongest growth companies in the healthcare space in the last few years. In 2022, the telemedicine operator grew its revenue by 94%, followed by 65% growth in 2023. That growth continued into 2024, with first-quarter revenue growth of 46% and second-quarter growth of 52%, representing total revenue growth of 49% in the first half.
The company has carved out a strong niche in the realm of men's health issues, addressing such conditions as erectile dysfunction, STDs, and hair loss. Men are notorious for not going to the doctor. In fact, past studies have shown that close to 60% of males don't see a doctor regularly. The company has been able to help close this medical gap by offering online consultations and selling prescriptions delivered by mail-order pharmacies through subscription programs.
This created a very nice recurring, high-margin stream of revenue for the company. Meanwhile, over the years, it expanded into other areas, such as women's and mental health. These are still newer areas that are gaining traction.
As the company scaled up, it also saw its sales and marketing efficiency improve. Its revenue is growing more quickly than its marketing spend, which leads to even better profitability growth. In its most recent quarter, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 270% year over year, from $10.6 million to $39.3 million, while its net income flipped from a loss of $7.2 million (negative $0.03 per share) to a profit of $13.3 million ($0.06 per share).
One knock on Hims & Hers' business is that it does not have a moat. However, the company has turned to personalized medicine formularies, which is helping it differentiate itself from competitors. Over 40% of its subscribers were using a personalized subscription at the end of Q2, and it expects to have 1 million subscribers with personalized subscriptions by year-end.
Amazon entering the market has always been considered a risk, but the e-commerce giant actually entered the space in all 50 U.S. states a year ago. Thus far, it has not affected Hims & Hers' growth in the least.
Image source: Getty Images.
Weight-loss drugs represent a huge opportunity
While Hims & Hers' core business and expansion into other areas drive strong results, perhaps the biggest opportunity for the company is in the area of weight-loss drugs. It entered this category a year ago, and it's already reached a $100 million revenue run rate in Q2.
Meanwhile, in May, the company announced that it will offer compounded GLP-1 weight loss drugs that will undercut the high prices of branded drugs in the category. Oral medication kits will cost $79 a month, while injections will cost $199 a month. This is a huge discount to the over $1,000 a month before insurance that branded drugs such as Ozempic and Wegovy can cost.
Given the popularity of GLP-1 weight-loss drugs, this is a huge opportunity for the company. To prepare for this growth, the company purchased a U.S. Food and Drug Administration (FDA) registered compounding facility in the U.S. to expand its production. It also believes that owning these facilities will allow it to enter other categories, such as hormonal therapy and menopause treatments.
Hims & Hers' personalization and compounding strategy do come with risks, as these offerings are being produced under the FDA's compound exemption. It wouldn't be surprising for drugmakers to challenge Hims & Hers' need to produce compounded GLP-1 weight loss drugs. However, Hims & Hers executives have said that the clinical necessity of compounding personalized medications has already been well established with needs of different dosing and strengths. It said that given the side effects of these medications, one size does not fit all, and so there is a clinical necessity.
GLP-1 drugmakers also warned about the quality and sourcing of compounded drugs, that aren't FDA approved. For its part, Hims & Hers COO Melissa Baird was one of the first patients to try its compounded GLP-1 offering.
The stock looks attractively valued
Trading at a forward price-to-earnings (P/E) ratio of under 21 times next year's analyst estimates, Hims & Hers' stock is very attractively priced for a company with its revenue growth and gross margin profile (around 80%). It's a subscription business, so its revenue is recurring in nature as well. These types of high-margin, recurring revenue business models typically get premium market valuations, which is why high-growth SaaS (software-as-a-service) companies can sometimes trade at between 10 to 20 times sales.
HIMS PE Ratio (Forward 1y) data by YCharts.
Hims & Hers isn't a technology company and isn't going to get a SaaS multiple, but its valuation is nonetheless very attractive at current levels given the growth of its core business together with the weight-loss opportunity in front of it.
Its compounding strategy does add some potential risk, but I think its growth opportunities and valuation make this stock a buy with a lot of potential upside in the years ahead.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Hims & Hers Health. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
