1 telemedicine stock I wouldn’t touch with a 10-foot pole (hint: it’s not Teladoc)

Some services experienced a once-in-a-generation boom during the peak days of the COVID-19 pandemic. One pocket of the healthcare field that witnessed abnormal levels of demand was telemedicine.

At the time, Health Teladoc has been hailed as the ultimate telemedicine darling; its stock price skyrocketed to nearly $300 per share. But the euphoria was short-lived. With the current stock price at just $8, there are a lot of people who have lost a lot of money investing in Teladoc.

Today, there is a new player in the telemedicine arena. And with its shares rising about 80% so far in 2024, I can’t help but see an uncanny resemblance to Teladoc.

Below, I’ll explain why I’m bullish on its long-term prospects His and her health (HE -1.75%)and shows why I wouldn’t touch this company with a 10 foot pole.

Jumping out of a hot zone…

One of the most in-demand areas of healthcare in recent years is mental health. According to the Bureau of Labor Statistics, employment trends in several fields related to mental health services have been increasing in recent years—and research suggests these increases will continue over the next decade.

However, despite the increase in the number of mental health workers, accessing care can be daunting for many people. A big variable in the dynamics of supply and demand for behavioral health services is cost. Because these services may not be covered by a health insurance plan, patients could be left with a lot of out-of-pocket expenses. For many, paying out of pocket isn’t even an option.

Hims & Hers Health 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 is right for them. Later, patients may receive prescriptions for generic equivalents to drugs such as Prozac or Zoloft.

…to another

Another hot area in healthcare right now is drugs for diabetes and weight loss. The overwhelming majority of this market is held by Novo Nordisk and Eli Lilly. Both of these pharmaceutical giants are developing a number of glucagon-like peptide-1 (GLP-1) agonists, including Ozempic, Wegovy, Rybelsus, Saxenda, Mounjaro and Zepbound.

Apart from Novo Nordisk and Lilly, companies like Roche and Pfizer is also looking to make inroads into the weight loss market. More speculative players such as Altimmune and Viking therapeutics they may also be on the verge of their own successful treatments.

Hims & Hers Health is also targeting this market. But there are two major points to consider.

First, while the GLP-1 market is poised to be profitable, this segment comes with a mountain of competition from companies much larger than Hims & Hers Health.

Second, Hims & Hers is not developing its own GLP-1 drug. Instead, the company relies on selling combination versions of existing drugs that are already approved by the Food and Drug Administration (FDA). Note that combination medications themselves are not FDA approved.

Image source: Getty Images

A useless strategy that could backfire

The business model of this telemedicine company is quite simple. Hims & Hers Health is trying to acquire customers who are looking for care, and the company is trying to lock them into a subscription. The idea is that these users can be cross-sold with other products and services over time, resulting in stronger unit economics in the form of accelerated revenue, margin expansion and profit generation.

While I understand that logic, I think the company’s long-term strategic goals for its user base are questionable. Specifically, during its 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 user experience. In fact, they’re even hiring a Chief Technology Officer (CTO) to lead this effort.

Don’t get me wrong: AI and machine learning have a lot of applications in healthcare and 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 that includes Nvidiahigh-performance graphics processing units (GPUs).

But when it comes to Hims & Hers Health’s AI ambitions, I can’t help but think that companies are reaching too far whenever a new trend emerges and spending unnecessarily on a strategy that ultimately doesn’t work.

A premium rating 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 they offer. Although the company has built an initial critical mass of subscribers, I wonder if Hims & Hers can sustain its growth, which for now is largely fueled by capitalizing on fragmented healthcare opportunities. Furthermore, I have doubts whether AI can unlock a new phase of customer acquisition and greater user engagement.

Additionally, Hims & Hers just submitted a mixed offer request a few days ago. While shelf deals aren’t inherently a bad thing, they’re not always good either. In this case, the company registered 976,341 shares of common stock to complete the acquisition of Nivagen Pharmaceuticals.

This offering is meant to complement Hims & Hers’ existing strategy of offering combination weight loss drugs. My personal view is that I do not like this purchase and am skeptical about 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 over 200, I think it goes without saying that Hims & Hers’ stock is expensive, and the valuation is way overdue.

While some may believe the company will disrupt healthcare, I see too many unknowns surrounding its growth potential. What it is It is known that Hims & Hers plans to spend a lot of money on AI while diluting shareholders to fund its strategic roadmap.

The bet may not pay. In the long run, I think Hims & Hers stock will leave a lot of unsophisticated investors holding the bag.