Is Hims & Hers Health the best growth stock for you?

Injectable weight loss drugs known as GLP-1 agonists have taken the world by storm. And stocks of the companies that make the drugs have crushed the market over the past two years. However, an industry-wide shortage of drugs has opened the door for companies such as His and her health (HE -0.83%) to compete by offering lower priced compound versions mixed by their teams.

Hims & Hers stock took off once the company announced it was bringing compound GLP-1 agonists to market.

However, there is speculation that the shortfall could end, and Hims & Hers has fallen back to earth since announcing its second-quarter earnings on August 5.

Is the recent stock crash an opportunity that makes it the best growth stock to buy? Or is Hims & Hers a fluke that already had its 15 minutes of Wall Street fame?

the GLP-1 hype misses the point

Hims & Hers has attracted attention for selling pharma compounds containing semaglutide, the active ingredient in Novo Nordiskto Ozempic. Patients can buy them for much less than the drug manufacturer charges. The well-documented demand for GLP-1 agonists highlights a simple growth opportunity for Hims & Hers that the market has been looking for.

Ironically, the market focuses on this and ignores most businesses. Hims & Hers is a telehealth platform that sells prescription and over-the-counter products for various conditions including skin, hair, sexual health, mental health and more. Hims & Hers generated $315 million in Q2 revenue, up 52% ​​year over year. How much of that was from GLP-1 sales? Only $15 million, or less than 5% of sales. In other words, Hims & Hers is growing very well without GLP-1 sales. Sure, GLP-1 products might still add fuel to the fire, but the fire is hot.

The stock’s recent volatility likely stems from concerns that the GLP-1 shortage will end, which would theoretically prevent Hims & Hers from selling its compounded versions.

There are two reasons why this fear might be exaggerated. First, as noted, Hims & Hers do well without GLP-1 agonists. Its non-GLP-1 weight loss products launched in the past year are already at an annual run rate of $100 million. Second, there is legal precedent that combination drugs, which are formulated for each patient’s needs, are not covered by manufacturers’ patents. Management believes this will allow it to continue to sell compounded GLP-1 after any shortages end. Hims & Hers has added a former Novo Nordisk executive to its board, who believes Hims & Hers will continue to sell compound GLP-1. Management is confident enough that they have purchased a combine plant to increase their production capacity.

But what if Hims & Hers is wrong? Well, Hims & Hers still sells branded GLP-1, so they might convert compound users to the proprietary versions at worst. GLP-1 sales are unlikely to do so complete disappear.

Here’s the bottom line: increasing GLP-1 is great, but it’s just the icing on the cake. Hims & Hers continues to skyrocket, with or without combined GLP-1 offerings.

An artificial intelligence company in the making?

Healthcare in the US is notoriously archaic and has many moving parts. This could be an opportunity for a data-driven company like Hims & Hers to disrupt and gain market share. That’s not to say legacy healthcare companies aren’t using technology, but it’s clear from Hims & Hers’ growth that patients are looking for better experiences at lower prices, and the company can use customer data to deliver that.

The company said about 40 percent of subscribers used personalized treatments in the most recent quarter. It uses patient data to formulate unique mixes and doses to deliver better treatments to patients. This potential competitive advantage takes these medical products from commodities to sticky, one-of-a-kind offerings that patients can’t get anywhere else.

In addition, management noted that the company is looking for a CTO with expertise in artificial intelligence to help build its AI engine. Hims & Hers could use artificial intelligence to analyze patient data and prescribe products instead of depending on human doctors. This could help boost growth.

Is the stock right for you?

Hims & Hers shares trade at just 28 times 2024 estimated earnings. That’s hilariously cheap for a company that:

• Guidance to increase sales by 60% this year.
• Consistently beating analysts’ expectations.
• Launching a $100 million share buyback program because it believes it has more cash than it needs to fund growth.
• Customer numbers rose 43% year-over-year in Q2 to 1.9 million.

Hims & Hers would have to screw up badly not to grow revenue fast enough to justify paying a price-to-earnings ratio of 28 today. Yes, the company has so much growth momentum.

However, stock isn’t for everyone; Hims & Hers is a classic case of high risk, high reward.

It’s a young and growing business that faces numerous risks, including regulatory threats and potential court battles over its compounding business. The stock’s upside potential is perfect for growth-oriented investors who can tolerate volatility and manage the risks they take. More conservative investors would probably do better elsewhere.