Hims & Hers Health (NYSE: HIMS) has built its brand up in recent years by focusing on offering its customers products related to sensitive issues such as hair loss and erectile dysfunction. And it is looking at other opportunities, such as weight loss, that can accelerate its already high rate of growth. This can make it a potentially exciting stock for growth investors to hold in their portfolios.
But despite the opportunities ahead, the stock is struggling. It's down more than 30% in just three months. Investors appear to be less bullish on the stock as its strategy for the weight loss market can be a risky one, and its valuation is by no means cheap. Is the recent sell-off in Hims & Hers stock an attractive buying opportunity for investors, or is there a danger that shares of the telehealth company could go even lower?
The company continues to generate strong growth
What has undoubtedly attracted many investors to Hims & Hers stock in the past has been its impressive growth prospects. The telehealth company has been growing its subscriber base significantly (currently it has around 1.9 million subscribers) and that has helped it to rapidly grow its top line. And there's nothing like a high growth rate to get investors excited about a business.
Hims & Hers posted its latest earnings numbers last month and for the period ending June 30, revenue came in at $315.6 million, rising by 52% when compared to the prior-year quarter when sales totaled $207.9 million. But while that's impressive, the growth rate has also been slowing down.
HIMS Revenue (Quarterly YoY Growth) data by YCharts
The good news for investors is that there is still room for the business to get bigger. Hims & Hers is targeting more opportunities in diabetes, fertility, and pain management. It has recently been giving patients access to popular glucagon-like peptide-1 (GLP-1) weight loss treatments via compounding pharmacies, a move that can be controversial and open it up to legal risks. But at least in the short term, it can give its sales a boost.
Does Hims & Hers have a lot of upside?
Although shares of Hims & Hers have been falling in recent weeks, the stock isn't near its 52-week low, which is just $5.65. It's well above that threshold, finishing last week at more than $14 per share. But based on the consensus analyst price target of just over $20, Wall Street puts the stock's potential upside at more than 45%. And those price targets only look at where the stock might go in the next 12 months; in the long run, the upside could be even higher.
Based on the stock's forward price-to-earnings ratio of 32, which factors in analyst estimates for Hims & Hers' future profits, the stock does appear to trading at a bit of a premium -- the average healthcare stock trades at 22 times its future earnings. But with Hims & Hers achieving such impressive growth numbers and it also still targeting some lucrative markets in the long run, it may be justifiable to pay a bit of a premium for the stock if it can continue growing its business at a high rate. Even if it can't sustain a 50% growth rate, growing sales by more than 20% for multiple years could ensure it remains a popular option with growth investors.
Should you buy Hims & Hers stock?
Hims & Hers is a healthcare stock that possesses a lot of potential growth in the long run. By targeting sensitive areas in healthcare and building trust with its customers, it may be able to take advantage of more upselling opportunities in the future.
There is some risk with the stock, however, because if its growth rate slows down significantly due to a recession, investors may have a hard time justifying paying a high premium for the stock. If you're comfortable with that unknown and the uncertainty and risk related to its GLP-1 strategy, Hims & Hers could make for good option to buy, because if it can continue to demonstrate good growth, it may be only a matter of time before the healthcare stock starts rallying again.
Given the current headwinds it's facing and its high valuation, it wouldn't surprise me to see Hims & Hers stock continue to fall in the short term. But in the long run, it could prove to be a great buy.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
