Is Hims & Hers Stock in Trouble?

Hims & Hers Health (NYSE: HIMS) is coming off a fantastic year in 2024 when its share price skyrocketed 172%. The telehealth company has been growing at a fast rate, making it one of the best stocks to own in healthcare of late.

But while the business is growing, investors should be careful not to overlook the challenges the company is facing. Not only is competition potentially ramping up, but a key growth catalyst for the business could be going away soon. Entering trading this week, the stock has fallen by around 15% in value in the past month as investors may already be heading for the exits.

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Is Hims & Hers stock in trouble, or is this just a bump in the road for what could still be a great growth investment to buy and hold?

An end to GLP-1 shortages could derail a huge growth opportunity

Hims & Hers makes it easy for patients to buy a growing list of prescription medications on its website. Among the most popular medications are undoubtedly GLP-1 drugs which have helped people lose weight.

The company doesn't make the drugs, but because of high demand, there have been shortages of them. And due to those shortages, Hims & Hers has been able to offer compounded versions of popular GLP-1 drugs, including Ozempic and Wegovy. Compounding drugs involves a mixture of two or more drugs. The Food and Drug Administration (FDA) has not approved compounded drugs, and it does not verify their safety.

But for Hims & Hers, offering such drugs has opened up a potential growth opportunity. The problem is that compounded drugs are only permissible while there are shortages. And those shortages could be ending soon. The FDA still has semaglutide, the active ingredient in Ozempic and Wegovy, listed as "currently in shortage," but all the doses are listed as "available," and it may only be a matter of time before the status is updated.

If Hims & Hers loses the ability to sell compounded versions of popular GLP-1 treatments, that could impact the company's growth prospects. The company which makes Ozempic and Wegovy, Novo Nordisk, has been investing into expanding its manufacturing capabilities as it looks to catch up to demand. But regardless of how long it takes for the FDA's shortage list to be updated, offering compounded drugs is likely not going to be a huge long-term growth opportunity for Hims & Hers.

Greater competition could pose another risk for the business

A potentially more significant problem for Hims & Hers is that tech giant Amazon is spending heavily on healthcare, and that could ramp up competition, drastically. The company offers prescription medication on its website through its pharmacy business, and it is now also offering treatment plans for Prime members via a telehealth service to help treat areas such as erectile dysfunction and hair loss, which are key areas that Hims & Hers focuses on as well.

The problem highlights a significant risk for Hims & Hers -- its business doesn't have a sustainable competitive advantage, or moat, which can fend off competitors like Amazon. By offering comprehensive, low-cost solutions, the tech giant can incentivize users to just go through its telehealth platform to seek out consultations and gain access to these types of treatments, as opposed to going through Hims & Hers.

A high level of competition could put pressure on the company's already thin margins. While Hims & Hers has posted a profit in each of its past four quarters, the company's operating profit has totaled just $42.9 million during that stretch -- just over 3% of its revenue.

Is Hims & Hers stock heading for a bigger decline?

Hims & Hers has grown its business significantly over the years. From less than $150 million in sales in 2020 to more than $1.2 billion in the trailing 12 months, the company has become one of the fastest-growing telehealth stocks to own in recent years.

But with the stock's recent gains and its trading at more than 50 times next year's earnings (based on analyst estimates), investors may already be pricing in a lot more growth in the future, which may not be a guarantee. Between GLP-1 shortages potentially coming to an end soon and Amazon continuing to invest in healthcare, there could be plenty of reasons for investors to feel more bearish about Hims & Hers stock right now.

The stock's high valuation and low margins make Hims & Hers a risky investment to own. Investors may want to consider sitting on the sidelines for now as there could be some tough times ahead for the stock not just this year but over the long haul as well.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.