Undergoing Potential Challenges for Hims & Hers' Shares?

Hims & Hers Health (HIMS 0.29%) experienced a phenomenal year in 2024, with its share price skyrocketing an incredible 172%. This telehealth powerhouse has been thriving, making it one of the best healthcare investments recently. However, investors need to consider the challenges ahead.

Competition might be intensifying, and a significant growth driver could be fading soon. As of the trading week, the stock has dipped around 15% in value, causing some investors to consider bailing out. But is this a temporary hiccup or a sign of impending trouble for this promising growth investment?

A Growth Opportunity's Threat - GLP-1 Shortage Conclusion

Hims & Hers offers a wide array of medication options on its website, including popular GLP-1 drugs for weight loss. Since these drugs have been facing shortages, the company has developed compounded versions of well-known treatments such as Ozempic and Wegovy.

The FDA has not approved these compounded drugs, and their safety is unverified. However, this practice opened up potential growth opportunities for the company. The issue is that compounded drugs are permitted only during shortages. With the end of GLP-1 drug shortages looming, Hims & Hers' growth prospects might be impacted. Manufacturers of these drugs, such as Novo Nordisk, are in the process of expanding their production capabilities, and the FDA's shortage list may soon update, limiting Hims & Hers' long-term growth potential with compounded drugs.

Amazon's Entrance & Intensified Competition

A potentially more significant risk for Hims & Hers is the increasing competition from tech giants, such as Amazon. The company now offers prescription medication and telehealth services, threatening Hims & Hers' focus areas like erectile dysfunction and hair loss treatments.

Hims & Hers struggles to maintain a sustainable competitive advantage, and Amazon's low-cost solutions can act as an incentive for users to bypass Hims & Hers for consultations and treatments. This high level of competition could place pressure on the company's already thin margins. While Hims & Hers has reported profits in every recent quarter, its operating profits amount to only about 3% of its revenue, making it a potentially risky investment.

Is Hims & Hers Poised for a Wider Decline?

Hims & Hers has achieved impressive growth in revenues, going from less than $150 million in 2020 to more than $1.2 billion in the last 12 months, placing it amongst the fastest-growing telehealth stocks.

Investors might already be pricing in excessive future growth, which could be challenging to meet. With both the potential end of GLP-1 drug shortages and Amazon's increased investment in healthcare, there could be multiple reasons for investors to reconsider their stance on Hims & Hers stock.

The company's high valuation and narrow margins make it a risky investment option. Investors might want to consider holding off for a while as the stock may face tough times not just this year but in the long run as well.

Enrichment Insights:- GLP-1 Drug Shortage Impact: Hims & Hers' growth rate may initially slow due to compounding restrictions as drug shortages end. However, the company may see explosive growth once regulations are in place, within 60-90 days.- Regulatory Uncertainty: Evolving regulatory landscape, especially with FDA's stance on tirzepatide and semaglutide shortages, adds uncertainty.- Strategic Mitigation: To mitigate these risks, Hims & Hers plans to incorporate liraglutide, reducing regulatory risks and expanding customer base.- Increased Competition: Amazon's entry into pharmacy could intensify competition, leading to pricing pressures and market share challenges.- Market Positioning: Despite competition, Hims & Hers boasts low-cost operations, data-driven personalization, and strong connection with Millennials/Gen Z, providing a competitive advantage.- Expansion into New Markets: Hims & Hers' expansion into menopause and hormonal therapy can help differentiate the company and attract a larger customer base.- Long-term Potential: Despite short-term challenges, Hims & Hers has strong long-term growth potential, aiming to expand subscriber base to 10-15 million and achieve significant EBITDA/FCF, making it an attractive investment opportunity.- Customer Base Expansion: Hims & Hers' focus on digital-first, customer-centric care and its ability to provide more value to customers by treating more conditions can increase average order volume, improving financial performance.

After considering the potential end of GLP-1 drug shortages, investors might need to reassess their expectations for Hims & Hers' growth, as the company's compounded drug offerings could be limited. Moreover, the entrance of tech giants like Amazon into the healthcare market might intensify competition, putting pressure on Hims & Hers' already thin margins and potentially making it a riskier investment option.