Most investors are comfortable with the idea of businesses like Apple and Microsoft having market caps in excess of $1 trillion. After all, those tech giants make products that hundreds of millions and even billions of people use every day. But tech companies aren't the only ones that have the potential to grow to such a massive size, and there's a solid chance that Eli Lilly (LLY -2.68%) could at some point represent the biopharma sector in the trillion-dollar club.
What's more, it could become that large in a relatively short period of time -- like before 2030. Here's what would need to happen for that to occur.
The path to $1 trillion
Today, Eli Lilly's market cap is a little north of $410 billion, which puts it among the top handful of big pharma companies. That means it'd need to grow by nearly 166% over the next six and a half years to reach $1 trillion by 2030. However, considering that it expanded its market cap by 178% since May 2020, it's at least plausible that Eli Lilly could repeat that feat in that time frame.
To dig deeper, we'll need to think about its growth prospects, its valuation, and how those two might reasonably be expected to change over time.
Its trailing 12-month net income is $6.2 billion, and its trailing price-to-earnings ratio is near 69, which is fairly high, but not at bloated tech stock levels. Over the last 10 years, thanks to tons of research and development spending, a regular schedule of commercializing new, in-demand medicines, and winning label expansions that increased the markets for its already-approved medicines, its net income grew at an average rate of around 14% per year. But in that same period, its price-to-earnings ratio averaged 38.
Today, the market is already pricing in future growth that's even faster than its average, likely as a result of the company's move to compete in blooming markets with treatments for conditions such as diabetes, obesity, and chronic kidney disease. The good news is that with such a high valuation, Eli Lilly won't need to add to its net income much faster than it did since 2013. If it maintains its current price-to-earnings ratio and brings in just 13.5% more earnings each year between now and 2030, it'll make $15.1 billion in net income that year, and its market cap will be just a hair over $1 trillion.
Will that actually happen?
So Eli Lilly doesn't need to move mountains or do much out of its regular routine to have a credible chance of being a trillion-dollar stock in 2030. But one key question is whether the company can actually grow steadily at that pace.
Per the average of estimates made by Wall Street analysts, the business is anticipated to report earnings per share of $8.76 in 2023 and around $16 in 2025. For that three-year period, in which management anticipates the launch of between six and 11 new medicines from its four programs currently awaiting approval decisions and its phase 3 roster containing 21 programs, that works out to a compound annual growth rate of more than 22%. After that, it could commercialize more of its current late-stage programs, and it could succeed in moving some of the 21 programs it now has in phase 2 trials to the market too.
In other words, yes, it's quite likely that Eli Lilly will be worth $1 trillion by 2030. It has the near-term potential to bring treatment candidates to market, driving a burst of growth over the next few years. After that, it'll have another cohort of candidates pushing toward hopeful regulatory approval. To be clear, that's business as usual for Eli Lilly, and management is also anticipating a fair amount of growth through the end of the decade.
The load-bearing Jenga block in this estimate, however, is its valuation. As long as the market continues to believe that there's a lot of earnings growth ahead, things will likely be fine. On the other hand, maintaining a P/E ratio nearing 70 isn't easy, though. Any underperformance in the business relative to overly high expectations could be an issue. Moreover, if the valuation of the entire market drops because of an unforeseen market crash, or enduring economic headwinds, the show's over -- Eli Lilly probably won't be able to make it to a value of $1 trillion by 2030.
But don't let that possibility get in the way of buying its stock. Doing so will probably leave you wealthier when 2030 rolls around, whether or not Eli Lilly's market cap hits that 13-digit milestone.
