The stock has performed well this year, but its best performance may be yet to come.
Hims & Hers Health (HIMS -1.35%) shares have had a bit of a rollercoaster ride this year. The stock is down about 35% from the highs it hit earlier this year, but is still up more than 85% year to date. As such, investors should be prepared for some volatility when investing in this stock.
Let's look at three things investors should consider when considering investing in Hims & Hers and whether the stock is ultimately a buy, sell or hold at current levels.
Significant growth in revenue and profitability
Hims & Hers has quietly been one of the fastest growing companies in healthcare over the past few years: The telehealth operator grew revenue by 94% in 2022 and 65% in 2023. This growth continues in 2024, with first-quarter revenue growing 46% and second-quarter growing 52%, resulting in total revenue growth of 49% for the first half of the year.
The company has established a strong presence in the men's health issue segment, addressing conditions such as erectile dysfunction, sexually transmitted diseases, and hair loss. Men are notorious for not going to the doctor. In fact, past studies have found that around 60% of men do not see a doctor regularly. The company is helping to close this healthcare gap by offering online consultations and selling prescriptions from a mail-order pharmacy through a subscription program.
This has created a very nice recurring, high-margin revenue stream for the company. Meanwhile, over the years the company has expanded into other areas, such as women's and mental health, which are newer areas that are still gaining traction.
As the company has grown in size, sales and marketing have become more efficient. The company's revenues are growing faster than its marketing expenses, making it more profitable. In the most recent quarter, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 270% year over year from $10.6 million to $39.3 million, while net income went from a loss of $7.2 million (-$0.03 per share) to a profit of $13.3 million ($0.06 per share).
One criticism of Hims & Hers' business is that it doesn't have a walled garden. But the company is turning to personalized drug formularies to differentiate itself from competitors. As of the end of the second quarter, more than 40% of its subscribers had personalized subscriptions, and it expects to hit 1 million personalized subscription subscribers by the end of the year.
While Amazon's market entry was always seen as a risk, the e-commerce giant did indeed enter all 50 US states a year ago. So far, it has had no impact on Hims & Hers' growth.
Image source: Getty Images.
Weight loss drugs create big opportunities
While Hims & Hers' core business and expansion into other areas are driving its strong performance, perhaps the company's biggest opportunity is in weight-loss drugs, a field it entered a year ago and already saw second-quarter sales reach $100 million.
Meanwhile, in May, the company announced it would offer a combined GLP-1 weight loss drug that would undercut the high prices of brand-name drugs in the category: $79 per month for an oral kit and $199 per month for an injectable — a big discount on the prices of brand-name drugs like Ozempic and Wegovee, which can cost more than $1,000 per month before insurance coverage.
Given the popularity of GLP-1 weight loss drugs, this is a big opportunity for the company. To prepare for this growth, the company has expanded production by purchasing U.S. Food and Drug Administration (FDA) registered compounding facilities in the U.S. The company also believes that owning these facilities will allow it to enter other areas such as hormone therapy and menopause treatment.
Hims & Hers' personalization and compounding strategy comes with risks because these products are produced under an FDA compounding exemption. It's not surprising that pharmaceutical companies would challenge the need for Hims & Hers to compound its GLP-1 weight-loss drugs. But Hims & Hers executives say the clinical need for personalized drug compounding is already well established, along with the need for different dosages and strengths. Given the side effects of these drugs, they say, one size doesn't fit all, and there's a clinical need.
GLP-1 drug makers have also warned about the quality and sourcing of compounded drugs that aren't FDA-approved.Meanwhile, Melissa Baird, chief operating officer at Hims & Hers, was one of the first patients to try the company's compounded GLP-1 product.
The stock price looks attractive
Hims & Hers shares are trading at a forward price-to-earnings (P/E) ratio of less than 21 times analysts' estimates for next year, which is very attractively priced given the company's revenue growth and gross margins (around 80%). The company is a subscription business, so the revenue is recurring. These high-margin recurring revenue business models typically command premium market valuations, so fast-growing SaaS (software-as-a-service) companies can trade at 10 to 20 times sales.
HIMS PE Ratio (1-Year Ahead) data from YCharts.
Hims & Hers is not a technology company and therefore does not command SaaS multiples, but given the growth of its core business and future opportunities for weight loss, its current valuation is very attractive.
Although there is some potential risk due to the compounding strategy, given the growth opportunity and valuation, I think this stock is a buy with the potential for significant upside over the next few years.
