We came across a bullish thesis on Medifast (MED) on Value Degen’s Substack by Unemployed Value Degen. In this article we will summarize the bulls’ thesis on MED. Medifast, Inc. share was trading at $18.51 as of Sept 6.

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Medifast (MED) was once a key player in the $7 billion structured weight loss program market, with revenues of $1.6 billion and net income of $143 million in 2022. However, the company's fortunes have declined sharply amid a new medical weight loss revolution led by Novo Nordisk's (NVO) Ozempic and other GLP-1 competitors. Medifast’s share price has plummeted from $332 to $21.30, while net income fell to $67 million and revenue dropped to $900 million. This decline raises questions about whether GLP-1 drugs have rendered Medifast’s platform obsolete or if MED can adapt to the changing market landscape.

Medifast operates like a cross between Herbalife and Alcoholics Anonymous, combining multilevel marketing with a behavioral psychology approach to weight loss. Despite the negative reputation of multilevel marketing, MED's model involves a sophisticated system for changing habits, utilizing techniques like high upfront costs, one-on-one coaching, and progress-tracking apps to create accountability and encourage success. Yet, GLP-1 drugs, while effective for weight loss, come with challenges such as muscle loss, the need for lifestyle changes, and nutritional supplements—areas where Medifast could still play a role.

To adapt, MED is transforming its business model to align with the GLP-1 weight loss trend. It has entered the $30 billion sports nutrition market and partnered with LifeMD (LFMD) to integrate its services with medical weight loss. This partnership includes access to LFMD’s doctors for GLP-1 prescriptions and related medical support, while Medifast provides coaching, lifestyle guidance, and nutritional supplements, all tracked via its Optavia app. MED aims to capture a share of the growing GLP-1 supplement market, projected to reach $50 billion by 2032.

Medifast's new strategy is currently being rolled out, with a $25 million advertising budget for 2024. Although there are challenges, including reduced program costs and the potential for slow uptake, the company is positioning itself in two expanding markets with a combined size of $80 billion. Furthermore, changes in how GLP-1 drugs are paid for, including potential Medicare and insurance coverage, could make Medifast's services more competitive.

Despite suspending its dividend to preserve cash, Medifast maintains a strong balance sheet with $150 million in cash and no debt. While there are risks, including insider selling and potential disproportionate benefits to LifeMD, MED could potentially see a return to its previous revenue levels if it successfully captures new market segments. This turnaround story is uncertain, but for value-oriented investors, Medifast offers a compelling risk/reward profile for a small position while awaiting further traction in its new strategy.

Medifast is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 16 hedge fund portfolios held MED at the end of the second quarter which was 14 in the previous quarter. While we acknowledge the potential of MED as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as MED but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None.