Eli Lilly (LLY 0.69%) is a top healthcare company, and it has generated mild but consistent growth over the years. And during the past decade, its share price has increased by more than 550%. While it does have some great assets in its portfolio that can deliver long-term growth, the stock also isn't cheap, trading at around 50 times its earnings.
Has Eli Lilly's stock climbed too quickly and gotten too expensive, or is this still a stock that could go higher?
Analysts remain bullish on the business
In December, several analysts updated their price targets for Eli Lilly. Even the lowest price target of $375 is still higher than where the stock trades today. And the highest forecast of $440, which came from Morgan Stanley, suggests an upside of potentially more than 25% from where the stock is now. That may, however, not be an enticing enough return for investors given the opportunities in the stock market today as many beaten-down stocks could offer better returns.
It's important to remember, however, that analyst price targets typically look at where the stock might go in the next 12 to 18 months. For long-term investors, there could be even more upside in the business if they buy and hold, assuming, of course, that the business performs well. But given Eli Lilly's strong track record, it seems probable that it will continue growing, especially given the assets it has.
A couple of key assets could be key to its future
Many healthcare companies hope to have at least one blockbuster drug that generates $1 billion or more in revenue they can build their businesses around. And that's often enough to drum up some excitement and bullishness from investors, particularly during a company's early growth stages. Eli Lilly has several blockbusters, including top-selling diabetes medicine Trulicity, which brought in $6.5 billion in sales for the company in 2021 and accounted for nearly one-quarter of its total revenue ($28.3 billion).
But what's likely to propel the stock higher in the future is the potential for some new products with the potential to generate billions in revenue. One is diabetes treatment Mounjaro (tirzepatide), which has also been effective in helping people lose weight. Tirzepatide isn't approved as a weight-loss treatment yet, but if that changes, it could be a massive opportunity. Some analysts think the drug could generate an incredible $25 billion in revenue at its peak.
Eli Lilly's Alzheimer's treatment, donanemab, is another exciting drug that may generate at least $6 billion in revenue at its peak. The Food and Drug Administration declined to grant donanemab accelerated approval earlier this month, citing insufficient patient data. However, it just wanted a larger sample size (100+ patients who used donanemab for at least 12 months), so it's not necessarily a sign that the drug won't obtain approval. The company will soon have more data as it plans to have a readout of its phase 3 trial results in the second quarter of this year, at which point it will begin the process of applying for traditional approval.
There's tons of growth that could be headed Eli Lilly's way, but the one thing that may impede the stock from rising is its current share price.
Is the stock's valuation too rich?
At more than 50 times earnings, Eli Lilly is trading well above the average multiple for healthcare stocks, which is 22. Even based on analyst estimates for future profits, it's trading at a multiple of 40 -- the industry average of 16 is below that as well. Over the past few years, Eli Lilly's stock price has risen at a faster rate than profits, and that has led to an increasing premium.
LLY PE Ratio data by YCharts.
There's no question that Eli Lilly's stock is expensive, and for investors, it comes down to whether the premium is justifiable.
Is Eli Lilly a buy despite its high valuation?
Eli Lilly's stock is expensive, but often investors are going to have to pay a premium when the business has such strong growth potential. The danger is worrying too much about the current earnings multiple, especially if the company is going to generate billions in additional revenue in the future which could significantly increase profits, thereby reducing its earnings multiple and making it look cheaper in the process.
If you're a long-term investor who is willing to buy and hold the stock for at least five years, then it's definitely not too late to buy the stock as the tremendous growth Eli Lilly may achieve in the future could more than make up for what looks to be a hefty price tag today.
