Pharmaceutical giant Novo Nordisk (NVO -0.86%) is best known for its synthetic insulin. However, its newest drug Wegovy, an FDA-approved weight loss medication, might have shareholders feeling a sugar high from massive stock gains -- 50% over the past year and 160% over three years.
Most investors have likely seen a stock make huge moves before, only to crash when the hype wears off. Are shares of Novo Nordisk destined for the same fate? Fortunately, the data shows that the stock could maintain its recent momentum.
However, the markets are turbulent, and the ride could get bumpy along the way. Here is what you need to know.
An emerging cash cow on its hands
Novo Nordisk is one of the leading companies in products treating diabetes and obesity. Roughly 422 million people worldwide have diabetes, and 39% of adults are overweight (13% are obese). These figures are higher in developed countries like the United States.
You can see below how the company's revenue growth has accelerated over the past couple of years, thanks to the arrival of its drug Wegovy, a weekly weight-loss injection approved by the U.S. Food and Drug Administration. The drug mimics the GLP-1 hormone to reduce your appetite. It expands Novo Nordisk's market opportunity beyond the existing drug Ozempic -- which is the same base drug, but dosed differently, and approved to treat type 2 diabetes.
NVO Revenue (Quarterly YoY Growth) data by YCharts.
Both drugs are still launching in various markets, and Novo Nordisk is ramping up investments in capacity. Analysts believe the company can do nearly $37 billion in sales by 2024, up significantly from $25 billion in 2022 (converted from Danish kroner). In other words, its growth spurt is just beginning.
Viewing the stock's valuation in a new light
A stock's valuation is subjective, boiling down to the market's expectation of how a company will perform in the future. Novo Nordisk trades at a price-to-earnings ratio (P/E) of 48 today, much higher than the P/E of 25 it averaged over the last decade. One could say that the stock is really expensive at face value.
But looking closer may show that's not the case. You can see below that Novo Nordisk's success has dramatically increased expectations for earnings growth. If analyst estimates are correct, the company's earnings per share (EPS) could grow by an average of 20% annually over the next three to five years.
NVO PE Ratio data by YCharts.
Nothing is guaranteed on Wall Street. But between the continued rollout of new drugs like Wegovy and a glaring obesity crisis in America (the world's most lucrative pharmaceuticals market), there's ample evidence that Novo Nordisk's growth is no fluke.
How should investors approach shares?
The stock price has appreciated tremendously over the past year, so some caution might be wise. Novo Nordisk has bright long-term prospects, but such a big jump in just one year could mean that shares pull back if the broader market hits some turbulence.
Rather than wait for the price to fall to a number that may or may not ever come, you can buy slowly, a strategy called dollar-cost averaging. Buying a little at a time will ensure your cost basis averages out, meaning you won't buy at the absolute best or worst time. As long as Novo Nordisk keeps putting up big numbers, the stock should help take care of your portfolio over the long term.
