Billionaires buy his and her health. Hand over fist. Should you follow their lead?

If you want to become a billionaire, paying attention to how other billionaires invest is a smart way to start. Everyday investors can easily track billionaire stock purchases as the US Securities and Exchange Commission (SEC) makes them disclose their trading activity every three months.

In the latest round of disclosures, it is clear that a handful of funds led by billionaire investors have bought shares of His and her health (HE) surrender the fist.

During the three months ended June 30, Israel Englander’s Millennium Management fund doubled its position with a purchase of more than 1.1 million shares. Sigma Investments, which is managed by John Overdeck and David Siegel, increased its stake by 145% by adding 1.5 million shares.

Stocks peaked in June, possibly in response to demand from hedge funds led by billionaires. Investors who missed the boat could now get in at a much better price. Hims & Hers traded more than 40% below its most recent high.

Why billionaires are optimistic about his and her health

Hims & Hers Health offers its customers a simple way to fill prescriptions for sexual health, dermatology, mental health and weight loss treatments. Instead of making an appointment and waiting weeks to see their primary care physician (PCP), customers simply complete a video visit over the phone and then wait for delivery.

Billionaire investors are likely attracted to Hims & Hers’ subscription-based business model, which has been a huge success of late. The company ended June with 1.9 million subscribers, which was 43% more than it had a year ago.

Membership is attractive to Americans with high-deductible health plans. It’s not recommended, but many Americans can save a lot of money by avoiding PCP and going straight to Hims & Hers.

In May, Hims & Hers began offering the compound semaglutide, the GLP-1 receptor agonist you probably know as Ozempic and Wegovy. This drug is still under patent-protected market exclusivity, but its manufacturer, Novo Nordiskcan’t keep up with demand.

The Food and Drug Administration (FDA) allows compounding pharmacies to manufacture and sell bottles of patent-protected drugs during a shortage. This means that Hims & Hers can offer its subscribers access to weight management treatment at a competitive price.

Hims & Hers achieved profitability in the first quarter before it began selling the compound semaglutide. Sales of the weight management treatment helped boost net income to $13.3 million in Q2, which represented about 4% of total sales.

Reasons to avoid his and her health

Novo Nordisk is experiencing an unprecedented explosion in demand for a biologic drug. However, as one of the world’s leading drug manufacturers, it’s only a matter of time before they catch up. Investors expecting rapid growth for Hims & Hers, driven by combined semaglutide sales, may be disappointed in a few months.

I don’t have the data to prove it, but I strongly suspect that Americans are flocking to Hims & Hers as a way to avoid their PCP. If this is the case, the giant insurers that employ thousands of PCPs such as UnitedHealth Groupthey have plenty of incentive to throw their weight behind a competing service.

The profits Hims & Hers reported this year will attract competitors big and small. With almost no barriers to entry in the telehealth space, expanding a thin profit margin could be more difficult than investors anticipate.

A buy now?

If Hims & Hers were to lose money again, I would tell investors to avoid this stock. Achieving generally accepted accounting principles (GAAP) profitability with fewer than 2 million subscribers, however, suggests that helping people avoid costly PCP visits is a great business.

Shares of Hims & Hers are up a lot this year, but expectations are still lower than you’d expect for a company that grew Q2 sales 52% year-over-year. At recent prices, you can get shares for just 25.6 times long-term earnings expectations.

Even if semaglutide sales stop later this year, Hims & Hers can continue to grow at a pace that justifies more than its current valuation. If you have a high risk tolerance, adding some stocks to a diverse portfolio might be a smart move right now.