Some services experienced a once-in-a-generation boom during the peak days of the COVID-19 pandemic. One pocket of the healthcare realm that witnessed abnormal levels of demand was telemedicine.
At the time, Teladoc Health was hailed as the ultimate telemedicine darling; its stock price skyrocketed to nearly $300 per share. But the euphoria was relatively short-lived. With its current share price at just $8, there are a lot of people who have lost a lot of money investing in Teladoc.
Today, there's a new player in the telemedicine arena. And with its shares soaring about 80% so far in 2024, I can't help but see an eerie similarity to Teladoc.
Below, I'll explain why I'm skittish on the long-term prospects of Hims & Hers Health(NYSE: HIMS), and show why I wouldn't touch this company with a 10-foot pole.
Leapfrogging from one hot area...
One of the most in-demand areas of healthcare in recent years is mental health. According to the Bureau of Labor Statistics, employment trends across several areas touching mental health services have been on the rise in recent years -- and research suggests these upticks will continue into the next decade.
Yet despite the increase in mental health workers, accessing care can be daunting for many people. A big variable in the supply-and-demand dynamics of behavioral health services is cost. Since those services may not be covered by a health insurance plan, patients could be left with a mountain of out-of-pocket expenses. For many, paying out of pocket isn't even an option.
Hims & Hers Health offers an offers a more efficient solution, avoiding the need to make multiple visits to various providers.
Using its platform a patient can take an online assessment and connect with a mental health professional who's right for them. Subsequently, patients may receive prescriptions for generic equivalents to drugs like Prozac or Zoloft.
...to another
Another hot area in healthcare right now is medications for diabetes and weight loss. The overwhelming majority of this market is held by Novo Nordisk and Eli Lilly. Both of these pharmaceutical giants develop a host of glucagon-like peptide-1 (GLP-1) agonists, including Ozempic, Wegovy, Rybelsus, Saxenda, Mounjaro, and Zepbound.
Aside from Novo Nordisk and Lilly, companies such as Roche and Pfizer are also looking to make inroads in the weight loss market. More speculative players such as Altimmune and Viking Therapeutics also could be on the verge of their own blockbuster treatments.
Hims & Hers Health is eyeing this market as well. But there are two major points to consider.
First, while the GLP-1 market is poised to be a lucrative, this segment comes with a mountain of competition from much larger companies than Hims & Hers Health.
Second, Hims & Hers doesn't actually develop its own GLP-1 medication. Instead, the company relies on selling compounded versions of existing drugs that are already approved by the Food and Drug Administration (FDA). Keep in mind that compounded drugs themselves are not FDA-approved.
Image Source: Getty Images
An unnecessary strategy that may backfire
The business model of this telemedicine company is pretty straightforward. Hims & Hers Health seeks to acquire customers who are looking for care, and the company tries to lock them into a subscription. The idea is that these users can be cross-sold other products and services over time, which leads to stronger unit economics in the form of accelerated revenue, margin expansion, and profit generation.
While I understand this logic, I think the company's longer-term strategic goals for its user base are questionable. Specifically, during the second-quarter earnings call, Hims & Hers explained how it plans to use artificial intelligence (AI) and machine learning to better understand customer data and create a better experience for users. In fact, it's even hiring a chief technology officer (CTO) to lead this effort.
Don't get me wrong: AI and machine learning have tons of applications in healthcare and in business-to-consumer (B2C) operations.
After all, Eli Lilly is working with OpenAI to discover treatments for antimicrobial resistance (AMR). Novo Nordisk is building a supercomputer featuring Nvidia's high-performance graphics processing units (GPU).
But when it comes to Hims & Hers Health's AI ambitions, I can't help but think companies just reach too far whenever a new trend emerges, and spend unnecessarily on a strategy that ultimately doesn't pan out.
A premium valuation that's hard to justify
Even though shares of Hims & Hers Health are up more than 80% so far in 2024, I see several reasons why the stock could crater.
For starters, I don't see anything really proprietary about what it offers. Although the company has built an initial critical mass of subscribers, I question whether Hims & Hers can sustain its growth, which for now is largely supported by capitalizing on fragmented opportunities in healthcare. Moreover, I have doubts about whether AI can unlock a new phase of customer acquisition and higher user engagement.
On top of that, Hims & Hers just filed for a mixed shelf offering a few days ago. While shelf offerings are not inherently a bad thing, they aren't always good either. In this case, the company registered 976,341 shares of common stock to complete the acquisition of Nivagen Pharmaceuticals.
This deal is meant to complement Hims & Hers' existing strategy of offering compounded weight loss drugs. My personal take is that I don't love this acquisition, and I'm skeptical of the long-term potential of this strategy. And the shelf offering comes with dilution for investors.
Based on a price-to-earnings (P/E) ratio of more than 200, I think it goes without saying that Hims & Hers stock is pricey and the valuation has gotten well ahead of itself.
While some may think the company is going to disrupt the healthcare field, I see too many unknowns surrounding its growth potential. What is known is that Hims & Hers plans to spend a lot of money on AI, while diluting shareholders to fund its strategic roadmap.
The gamble may not pay off. In the long run, I think Hims & Hers stock will leave a lot of unsophisticated investors holding the bag.
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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. Adam Spatacco has positions in Amazon, Eli Lilly, Novo Nordisk, and Nvidia. The Motley Fool has positions in and recommends Amazon, Nvidia, Pfizer, and Teladoc Health. The Motley Fool recommends Novo Nordisk, Roche Ag, and Stitch Fix. The Motley Fool has a disclosure policy.
