What potential issue is the user experiencing with the output formatting in the PHP code?

The potential issue the user is experiencing with the output formatting in the PHP code is that the HTML tags are not being interpreted correctly and are being displayed as plain text on the webpage. To solve this issue, the user needs to use the PHP `echo` function to output the HTML tags along with the dynamic content.

<?php
$name = "John";
echo "<h1>Welcome, $name!</h1>";
?>