Telehealth company Hims & Hers (NYSE:HIMS) is familiar to most consumers from the virtual ubiquity of its radio, TV and online advertising. Operating as a subscription-based provider of everything from sexual health to weight loss products, Hims & Hers is currently the second-largest public telehealth company in the US by market capitalization.
With direct-to-consumer healthcare gaining popularity and the brand’s high level of recognition, HIMS has produced spectacular returns for investors over the last year. The stock has more than doubled in the last 12 months and risen by nearly 30% in the last month alone.
Just how high can Hims & Hers go, and is now the time to invest in this rising telehealth star?
Why Is Hims & Hers Rising?
Hims & Hers has produced several successes recently. Chief among these has been a move toward net profitability, which the company achieved for the first time in Q4 of last year. Net income has increased in each of the two subsequent quarters, rising to $13.3 million in Q2.
Hims & Hers has also seen extremely strong revenue growth in the last year. In Q2, the company generated $315.6 million in total revenue, an increase of 52% over the year-ago quarter. This is an area in which Hims & Hers has been consistently successful thanks to the top line predictably rising in each quarter since the company went public in 2020.
Driving much of this growth has been a similar expansion in the company’s subscriber base. Q2 saw the number of subscribers rise 43% year-over-year to 1.9 million.
On average, each subscriber contributed $57 per month in revenues, up from $53 a year ago. This is highly encouraging because it suggests that management is succeeding not only in capturing new customers but also in increasing the value of its existing customer base.
The company and its stock are also getting a boost from the current interest in GLP-1 drugs for weight loss. In May, Hims & Hers announced that it would provide access to a compounded equivalent of weight-loss drugs like Wegovy. This decision has significant potential to benefit the company in the short term because there is currently a shortage of GLP-1 drugs and a massive market demand for them.
Last but not least is the fact that Hims & Hers is in a very strong financial position. The company’s cash stockpile sits at about $129 million, and the company’s long-term debt is virtually non-existent.
High Valuation Poses A Threat
HIMS currently trades at nearly 90x expected earnings and 11.5x book value, reflecting investor expectations of very high growth rates ahead.
While the company’s price-to-sales multiple is much more reasonable at about 3.9, this still assumes that a fairly high rate of forward growth will continue for some time.
The Bear Case Against HIMS
In addition to the stock’s sky-high valuation, there are additional problems that bears are quick to point out. To begin with, the company primarily offers an unlinked array of products that are already available elsewhere. Convenience factor aside, this doesn’t give the company a particularly strong moat.
Hims & Hers also seems to be jumping on each bandwagon that comes along, potentially exacerbating its valuation issues and creating a lack of cohesiveness in its business strategy. For instance, the company is currently touting the idea of using AI to increase the number of products it sells, a strategy that seems more tech trend than fundamental business expansion plan.
The idea of compounding GLP-1 weight-loss drugs, likewise, seems more like an attempt to grab onto a healthcare trend than a plan for creating a long-lasting presence in the anti-obesity drug market.
Although Hims & Hers can create a great deal of short-term value by offering compounded versions of scarce drugs, it may not be able to maintain its market position as Novo Nordisk and Eli Lilly increase their production of brand-name products.
Other companies are also rushing to produce generic GLP-1 pharmaceuticals, potentially eroding Hims & Hers’ market position.
Despite scaling revenues quite well, it’s also notable that Hims & Hers maintains a very low level of profitability. Trailing 12-month net margin as of the end of Q2 was just 1.6%.
Though the company’s recent turn toward GAAP profitability offers it plenty of room for earnings growth, it will have to achieve much higher margins to justify its high valuation. It’s especially striking how low net margin is given the fact that gross margin as of Q2 was 81%.
How High Will Hims & Hers Stock Go?
Analyst price targets predict Hims and Hers stock will rise to $21.93 per share over the next 12 months, about 16% above present levels. Though far from the kind of returns the stock has delivered in the last year, this would still allow HIMS to produce solid gains for shareholders.
A caveat to the optimism is that recent insider selling may indicate the stock is closing in on the limits of its current valuation.
Insider selling has outweighed buying by roughly 18x in the last 12 months, and most of that selling activity has taken place in Q2 and Q3.
Insider ownership is still quite high at over 17%, but the uptick in selling activity may suggest that company insiders see the stock as potentially overvalued.
Taking everything into account, a range of $20-22 for HIMS seems plausible over the next year. The stock still appears to have some momentum behind it, and future increases in earnings and revenues could push shares higher. This is especially true given the extremely high levels of revenue growth Hims & Hers is still managing to deliver.
The bigger question is how Hims & Hers will perform over the next several years. Here, unanswered questions about competitive advantages and profitability begin to plague the stock.
With such a high price tag affixed to it, HIMS likely isn’t the best buy for many conservative-minded investors at the moment. Those who locked in better pricing when the stock was sold off, though, may do well to hold.
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