Home to the likes of tech heavyweights like Apple and Alphabet, the club of companies worth more than $1 trillion in market cap is quite exclusive. So far, no single enterprise in the healthcare sector has been able to join the cadre -- but could Pfizer (PFE -0.12%) eventually be the first?
Right now, Pfizer's market cap is about $303 billion. Could it grow to reach somewhere near $1 trillion in the next 18 years? Let's do a few calculations and compare what we find to its core business model and past performance to see how realistic that might be. I think the answer may surprise you.
Image source: Getty Images.
Setting the stage
As we all know, Pfizer is a pharma company that's responsible for developing and selling medicines.
The company's trailing-12-month revenue is approximately $81.2 billion, though management expects to bring in roughly $100 billion this year. Therefore, I'll be using that figure as my starting point and projecting its inflows forward by 17 years instead of 18 to compensate.
Assuming that Pfizer meets its estimates for 2022, its total revenue will grow by around 23% year over year. That burst of growth is all but guaranteed to be temporary, and perhaps even untenable in the long run. In short, sales of the company's coronavirus vaccine Comirnaty and its coronavirus antiviral pill Paxlovid are the major drivers for such a large jump in income. Paxlovid is anticipated to earn $22 billion, and for Comirnaty, $32 billion. In fact, without these two wonder medicines, the business admits that it would have only grown by around 6% in 2021.
Still, it seems likely that the world will continue to need a steady supply of medicines combating the coronavirus, as it's unlikely to leave us fully anytime soon. In 2022's revenue mix, Comirnaty and Paxlovid will likely account for $54 billion, which is equal to 54% of the year's expected total.
Let's assume there will be some ongoing demand for these products for the duration of our projection but that there won't be an explosion of growth like there was in 2021 and 2022. After all, developed markets are likely saturated with coronavirus jabs, and it isn't the only company making effective vaccines or antivirals to fight the pandemic. And remember that Pfizer's base of revenue was expanding slightly even without these two products.
So for the purposes of the projection, I'll assume it can continue to grow its annual revenue by at least 8% each year for the next 17 years. That's not an unsustainably fast pace for a mature company, but it does bake in another set of assumptions, namely that the pharma will continue to be effective at discovering, developing, and commercializing new medicines.
Will it join the trillion-dollar club?
Now that we've pinned down an estimate of Pfizer's future growth rate, it's time to get down to valuation. The company's trailing 12-month price-to-sales (P/S) ratio is currently around 3.5, which is on the lower side of its normal range over the past decade. Let's say that its valuation won't be changing much over time since it's unlikely that there will be another event like the pandemic that could massively shake up the market's price sensitivity and ideas of the stock's value.
Given everything outlined above, we can now take an educated guess at whether the stock will be worth $1 trillion by 2040. If it can increase its revenue at a rate of 8% per year, the company will be making a grand total of $300.4 billion per year by our deadline. If we multiply that value by the P/S ratio, we get a market cap of (drumroll, please) just over $1 trillion!
Of course, it's important not to read too much into this result.
Though in principle it's possible for Pfizer to be worth $1 trillion by 2040 if it maintains the conditions I specified, it has gone through entire decades where growth was hard to come by. For example, between 2009 and 2019, its compound annual growth rate (CAGR) for sales was just over 0.3% per year. Past performance doesn't imply future performance, but it does demonstrate that it's (really) hard for massive businesses to keep expanding at a consistent rate over time.
Then again, that period wasn't during a global pandemic where it was making two of the most effective and widely distributed tools to protect human health.
In closing, it's highly probable that Pfizer will experience quite a bit of growth in the next few years, though it's also highly probable that the pace of that growth will start to ebb simply because it's tough to maintain such momentum. If you're looking for a long-term investment to hold for years and years, this stock could easily be it -- just don't expect it to beat the market when sales of coronavirus medicines reach their peak.
