Is Hims & Hers Health Stock a Buy?

Established in 2017, Hims & Hers Health (NYSE: HIMS) is a relatively young company addressing age-old healthcare challenges by offering prescription medications, over-the-counter products, and personal care solutions through a convenient direct-to-consumer model. Since going public via a special purpose acquisition company (SPAC) merger in 2021, the telehealth company and its stock have experienced dramatic transformations.

Following the merger, the stock traded somewhat volatilely but on a downward trend for much of 2021 and part of 2022, reaching an all-time low of $2.72 per share in 2022. It has recovered since then and hit an all-time high of $35.02 per share in late 2024. Since then, the price saw additional volatility and now trades around $30.73 a share. Meanwhile, the business continues to report surging subscriber growth and increasing revenue.

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Let's take a closer look at how the company is performing today and whether the stock is a buy, sell, or hold for long-term investors.

Hims & Hers Health's latest financials

For its most recently reported quarter (Q3 of 2024), Hims & Hers generated $401.6 million in revenue. That resulted in a free cash flow of $79.4 million, representing year-over-year revenue growth of 77% and free cash flow growth of 311.4%.

Much of that sharp increase in growth is due to its subscriber growth, particularly for its GLP-1 compounded drug offering, which helps with weight loss. Management had projected its GLP-1 solutions subscriber growth to increase by 40% from third-quarter 2023 to Q3 2024. Overall, the company had 2 million subscribers (up 44% year over year), resulting in an average monthly revenue of $67 per user (up 24%).

Beyond its revenue growth, the company boasts a healthy balance sheet, with $254 million in net cash. This allows management flexibility with its capital allocation to invest in the business or repurchase shares instead of paying down debt.

Here are the risks for Hims & Hers Health

Like many nascent public companies, Hims & Hers has a stock-based compensation problem. Stock-based compensation helps young companies attract and retain talent with an ownership stake, but it can become costly over time. Additionally, the company has utilized its stock to acquire other businesses, most recently with its acquisition of MedisourceRx, a 503B outsourcing facility in California. Hims & Hers issued 976,341 shares of common stock to Nivagen Pharmaceuticals, the previous owner of Medisource, to fund the transaction.

Overall, since emerging as a publicly traded company just four years ago, Hims & Hers' outstanding shares are up 15%. To help mitigate these issues, mature companies often aim to return capital to shareholders through share repurchases, which can be expensive if growth drives up share prices -- like in the case of Hims & Hers. Through the first three quarters of 2024, the company spent $78 million on share repurchases, yet its basic outstanding shares grew from 211.6 million to 216.6 million, or 2.4%. That means this money didn't help increase shareholders' ownership stake -- it only limited further dilution.

HIMS Shares Outstanding data by YCharts.

Another ongoing risk for Hims & Hers is that its business is at the mercy of the U.S. Food and Drug Administration (FDA). Hims & Hers can produce and sell patented drugs at a larger scale using a compounding process under certain conditions (like shortages). Recently, the FDA ruled that the shortage of the weight loss drug tirzepatide is resolved. This means that manufacturers of compound versions of the drug sold by the likes of Hims & Hers have until Feb. 18, 2025, or March 19, 2025 (depending on their licensing) to wind down their tirzepatide operations.

Hims & Hers appears to have a backup plan to deal with this issue. During its most recent quarterly earnings call, CEO Andrew Dudum said the company has plans to bring liraglutide, the first generic GLP-1 on the market, to the platform in 2025. Management has also said it plans to continue using compounding on a smaller scale that remains permissible under FDA guidelines, although the patent holders are likely to challenge this course of action.

Here's what lies ahead for Hims & Hers Health stock

In the short term, management previously guided for its fourth-quarter 2024 revenue to be within the range of $465 million to $470 million. If that actualizes when the company announces its earnings in late February, it would represent year-over-year growth of 88% to 91%.

In the coming years, as the weight loss drug revolution unfolds, investors should expect some uncertainty around which drugs Hims & Hers will be permitted to sell and/or compound. However, Dudum highlighted the company's true strength: "Our technology platform enables us to support consumers in identifying their options and help providers match their patients with the most appropriate solution for an individual's personal clinical need."

In the long term, the company plans to focus on automating its affiliated facilities, a move management believes will drive greater efficiency and deliver better value to customers. Additionally, management has expressed its commitment to pursuing "strategic M&A transactions." While this approach could affect the balance sheet or increase the share count, it is ultimately expected to support the company's growth.

Is Hims & Hers Health a buy, sell, or hold?

Before adding any stock to your portfolio, you should check on its valuation. As of this writing, Hims & Hers trades at 47 times its trailing 12 months of free cash flow. On the surface, that seems expensive, and a value investor would scoff at that valuation. But for investors looking for growth, Hims & Hers offers just that, and since becoming free cash flow positive, this is close to the stock's cheapest valuation.

Data by YCharts.

Going forward, shareholders should keep an eye on how well management can pivot with its weight loss offerings and tame its share count. However, as long as the company maintains rapid growth in revenue and free cash flow, the stock looks poised to continue its market outperformance, making it a buy for growth investors.

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Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.