Vertex Pharmaceuticals (VRTX -0.20%) is a rapidly growing healthcare company that offers products which help treat patients with cystic fibrosis (CF). It's also moving beyond that and into other areas to diversify its business. With multiple drugs in its portfolio and more approvals that could be on the way, the stock possesses lots of growth potential.
It's no wonder Vertex has been beating the markets this year. Its shares are up 27% while the S&P 500 has declined 16%. There's no doubt that Vertex has a bright future ahead, but can it generate the type of returns you need to retire a millionaire?
What kind of returns do you need to get to $1 million?
If you're saving for retirement, then there are multiple factors that will dictate whether you can get to $1 million: how many investing years you have left, how much you invest today, and what your average growth rate will be.
To simplify things, I'll assume that you have at least 20 to 30 years to go before you retire. And ideally, you have at least $25,000 that you can invest in the long term. If you don't have that much, you may be better off savings up until you get to at least that threshold.
While the stock market is a great way to build wealth, you still need money to make money; growing a $5,000 investment into $1 million would mean you have to make some extremely favorable assumptions with respect to the growth rate (e.g., that your investment grows at a rate of 20% for nearly 30 years).
By building up some savings and having more to invest, you can make it more probable that you end up with $1 million by retirement without relying on a high growth rate. Here's a look at how the growth rate can result in significantly different portfolio values over a 30-year period on a $25,000 investment:
Based on the above chart, a good growth rate to target is about 13% so that by year 30, your $25,000 investment will be worth around $1 million.
Can Vertex help generate that type of growth?
In the past five years, shares of Vertex have risen 83% (better than the S&P 500's returns of 63%). That averages out to a compounded annual growth rate of almost exactly 13%. If the company can continue growing at that rate for decades, it could be a millionaire-making investment -- based on the assumptions noted earlier.
The reason this can be possible is that Vertex is continually growing. This year, it projects product revenue between $8.6 billion and $8.8 billion. At the mid-point, that represents a growth rate of over 14% from the $7.6 billion in product revenue that Vertex reported in 2021.
That may not be the type of growth rate investors would expect from a stock that can deliver market-beating returns for decades. But what makes Vertex promising is that the business is expanding its core business and becoming more diverse. It has a pipeline that features promising products, including VX-147, which is in phase 3 trials to treat kidney disease. VX-548 is in phase 2 trials for pain treatment.
The company is also working with CRISPR Therapeutics on a gene-editing therapy, CTX001, to treat rare blood disorders, which could generate billions in revenue. That's in phase 3 trials and the companies plan to file for regulatory approval by the end of this year.
Vertex is pursuing these growth opportunities while also generating strong financials along the way. Net income of $3.2 billion over the trailing 12 months was an impressive 38% of revenue. It has also accumulated $3.8 billion in free cash flow during that time.
The company's strong financials put it in a great position to fund its own growth without having to dilute investors the way risky biotech stocks might. Although its near-term growth rate may not look all that impressive, over the long haul, Vertex's numbers could look much stronger.
Should you buy Vertex Pharmaceuticals stock?
Vertex's stock trades at 23 times its trailing earnings. That's a bit higher than the multiple of 20 that the average healthcare stock trades at today. However, given the growth potential for the business, a premium is justifiable.
Even though the stock has been rising in value over the years, it's still not too late to invest in Vertex. The company has everything you might want from a growth investment: a strong pipeline and financials to support its growth.
Of course, no single stock can do all the work alone. Investors always want to have a diversified portfolio. But Vertex could potentially help make you a millionaire by retirement time, provided that you invest at least $25,000 into Vertex and other similarly promising companies that stand to outperform the market in the long run.