Eli Lilly (LLY 1.19%) has been a scorching hot buy in 2023 -- its shares are up more than 55% so far this year. But with the stock trading now at a multiple of 80 times earnings, it certainly isn't cheap. And if you go by Wall Street's price targets, you might think the stock is indeed expensive and that it's too late to invest.
Are analysts right? Has the stock already peaked, or is there still time to buy shares of this top pharmaceutical company?
Most analysts aren't pricing in much more upside
Based on analysts' consensus price target of $532.78, Eli Lilly's stock -- lately in the neighborhood of $575 -- is already well past the peak and potentially due for a decline. Some analysts have been upgrading their price targets. But even based on the 10 most recently issued price targets, most of those analysts see less than 10% upside potential for the stock in the next year.
Source: MarketBeat. Chart by author.
Investors should remember, however, that analyst price targets are based only on where analysts think the price will go over a fairly short time frame.
Are analysts right about the stock?
There are a couple of things to consider about Eli Lilly's stock. One is its valuation, and the second is its earnings growth. While a multiple of 80 times earnings is high, some investors may feel that a high premium for the business is justified given that Eli Lilly has some attractive assets.
Mounjaro, for example, may be one of the most profitable drugs ever made, with some estimates forecasting peak sales as high as $100 billion. The company also has donanemab, which may obtain approval as an Alzheimer's treatment this year.
Determining how much of a premium a stock is worth can be challenging. Over the past few years, Eli Lilly's price-to-earnings ratio has risen from more than 20 to now over 80. But if the company can generate high growth, investors may continue to pay a high premium for it.
In the chart below, I've shown some of the directions that Eli Lilly's stock could move toward by the end of next year.
- In a best-case scenario, it could jump to $1,005. This is based on two assumptions: that investors will still be paying approximately what they are now, around 80 times earnings, and that the company reports earnings per share of $12.66 next year (up from $7.20 over the trailing 12 months), which is the average estimate from analysts as of Sept. 18.
- In the more moderate scenario, the share price increases to $633. This still assumes that Eli Lilly reports 2024 earnings of $12.66, but investors scale back the magnitude of the premium they are willing to pay to just 50 times earnings.
- Lastly, there is the worst-case scenario in which the company doesn't achieve any earnings growth, its EPS stays at $7.20, and investors are only willing to pay 50 times earnings. Then, the stock price would drop to $360.
Image source: Yahoo Finance. Chart by author.
Is Eli Lilly stock a buy?
It seems probable that Eli Lilly will generate strong earnings growth next year given the promising assets it has in its product portfolio and how diversified that portfolio is. It's really a question of how much of a premium investors are willing to pay.
Given that Mounjaro will still be in its early growth stages and possibly donanemab will have obtained approval by then, I'm inclined to believe investors will remain willing to pay a high multiple for the stock, perhaps somewhere between 50 and 80 times earnings. That leads me to believe that the analysts are indeed wrong about this stock, and to conclude that it has more upside potential than just 10% in the near term. And in the long run, its gains could be even greater for investors.
It's not too late to buy this healthcare stock, because between the earnings growth ahead and the high valuation the stock may still command, Eli Lilly can definitely rise a lot higher.
