Investors shouldn’t assume that all of the company’s future growth is already priced into the stock’s valuation.
Eli Lilly (LLY -0.95%) is emerging as arguably the top stock in the anti-obesity market. It has a couple of fantastic products in Zepbound, which is approved for weight loss, and Mounjaro, which is essentially the same thing but is approved to treat diabetes. Between the two of them, the company is sitting on a gold mine, with their combined peak annual revenue potentially topping more than $50 billion. That’s not too bad for a company that generated less than $35 billion in all of last year.
But as promising as those products may be, they aren’t why I think Eli Lilly can hit a $1 trillion market capitalization and keep going higher. Instead, it’s management’s outlook for the future and its long-term strategy that should have investors bullish on the road ahead. This can still be an excellent stock to buy, even at what may seem like a hugely inflated valuation.
Eli Lilly looks to “exploit” its lead
Being the top company in the anti-obesity market and the most valuable healthcare company in the world is impressive, but staying in those positions is going to be difficult, and Eli Lilly knows that. This is why management isn’t content with sitting back and watching revenue for Zepbound and Mounjaro roll in. Instead, the company remains focused on building out its business so that it’s even more robust, and so that it develops further products to fuel its long-term growth.
Management is investing billions into growing its business and developing more products. Eli Lilly CEO David Ricks knows the company has a lead in the anti-obesity market but he says it plans to “exploit that lead” by working on bringing more products to market. It won’t be easy but management’s plan to add capacity and develop further weight-loss products is why Eli Lilly can be a growth machine for years to come.
Promising products in its pipeline could be near the finish line
The company has many other weight-loss products in development that can become future growth catalysts for the business. Orforglipron is an oral weight loss product that is currently in phase 3 trials and could come to market soon. In clinical trials, after 36 weeks of use, participants on the once-daily pill lost an average of 14.7% of their body weight.
Retatrutide is another promising drug. Patients take it as a weekly injection, and in clinical trials it has helped them lose 17.5% of their body weight after 24 weeks. It will be exciting to see what the drug could achieve over a longer time frame as that weight loss is already comparable to what patients might achieve with Zepbound or Mounjaro.
What may be most important for patients in the end are the side effects and overall tolerability of these drugs, given that they may need to stay on them indefinitely — one of the risks is that once patients stop taking the treatments, they may regain some or all of the lost weight. And this is why developing further weight-loss treatments can still be a good move for Eli Lilly even if the weight loss achieved is similar to other drugs.
Is Eli Lilly a no-brainer buy?
Eli Lilly isn’t cheap to own. With the stock trading at more than 130 times earnings, many investors are likely spooked by its valuation. But as the business grows, its earnings will rise and that multiple will come down. Cautious growth investors may point out that with a forward price-to-earnings multiple of 66, its near-term growth is already priced in to the stock, and it’s still at a high valuation.
But as Eli Lilly obtains approval for more drugs, price targets, estimates, and the overall outlook for the business will get a boost. If you invest in the stock before all of that happens, you could stand to earn a much better return than if you wait. While there are no guarantees as to which products may obtain approval, for such an innovative company with a solid track record, Eli Lilly is arguably worth taking the risk. With management zeroed in on growing its operations, this can be a terrific stock to put in your portfolio for the long haul.
In the near term, Eli Lilly may look like it’s an expensive stock but if you’re hanging on for five years or more, you can still be in a position to generate even more fantastic returns.
David Jagielski 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.
