Weight-loss drugs are the health craze of 2023. According to the management of Walmart, America's largest retailer, drugs like Ozempic and Wegovy have begun impacting food sales.

Perhaps it shouldn't be surprising that shares of Novo Nordisk (NVO 1.79%), the pharmaceutical company behind Ozempic and Wegovy, have done well. The stock is up 36% since January and more than 70% over the past twelve months.

So, is it too late to enjoy this potentially monumental shift in the healthcare landscape? Or is Novo Nordisk's fortune a fad, like many previous health trends? Here's what you need to know.

Understanding the science of fighting obesity

While industries like tobacco stocks and other sin stocks get plenty of scrutiny, food and beverage companies have flown under the radar for decades. The industry has profited by steadily inflating waistlines, especially in the U.S. According to the Centers for Disease Control, nearly 42% of the U.S. population was obese as of 2017, up from 30.5% in 1999-2000.

Studies have shown that processed sugars can be addictive, creating a stimulus in the brain similar to those of cocaine and opioids. If you've ever tried dieting, you probably know how hard it is to resist the temptation of junk food.

Novo Nordisk has developed two primary weight-loss drugs, Ozempic and Wegovy. These are glucagon-like peptide-1 (GLP-1) receptor agonists. GLP-1 is a natural hormone that stimulates insulin in your body, slows digestion, and makes you feel full. These drugs effectively mimic this hormone, creating the same effects.

Hormones are potent, which helps explain why these drugs have been so successful in assisting patients to manage their diabetes or lose weight. Ozempic and Wegovy require prescriptions; Ozempic is approved for treating diabetes, while Wegovy is approved for chronic weight management.

The market opportunity is very new

Ozempic received FDA approval in 2017 and Wegovy in 2021. You can see below that Novo Nordisk has had accelerated revenue and earnings growth over the past several years, primarily due to these drugs' success:

NVO Revenue (TTM) Chart

NVO Revenue (TTM) data by YCharts.

But this could be a decade-plus growth story still in its early chapters. As of second-quarter earnings, Novo Nordisk had about 4.5 million total scripts for Ozempic and 94,000 for Wegovy in the U.S. America's population is about 335 million people, and an obesity prevalence of 42% would mean a potential market of up to 139 million patients, minus children (Wegovy is approved for ages 12 and up with certain conditions). Still, the opportunity is a matter of tens of millions of people in the U.S. alone.

Goldmine opportunities always attract lots of attention. And competition is racing to the scene, including an alternative product from Eli Lilly which has hit the market. Novo Nordisk's CEO Lars Fruergaard Jørgensen said in late 2022 that he's not worried about margin pressure, because the market opportunity is far more significant than the available supply.

Is Novo Nordisk stock a buy?

The stock's price rise makes a lot of sense when considering Novo Nordisk's growth spurt, but the question is whether there's still room for future gains. Novo Nordisk trades at a forward P/E of 36, which is certainly not appealing at face value. However, analysts believe the company will continue selling a lot of Ozempic and Wegovy, and estimate earnings growth averaging 20% annually over the long term.

The PEG ratio helps put the valuation in context; the resulting 1.8 ratio signals the stock isn't cheap, but it's not as expensive as it seems because of the anticipated growth on the way. The risk in looking ahead is that Novo Nordisk must hit these estimates, but the marketwide opportunity in diabetes care and weight management doesn't seem like a fluke.

NVO EPS LT Growth Estimates Chart

NVO EPS LT Growth Estimates data by YCharts.

The stock price has seemingly priced in short-term growth, but long-term investors willing to hold for years at a time could nibble at shares here, and wait for the business to grow into the stock's valuation. Consider buying slowly so that if the broader market gets shaky and shares fall, you can capitalize by scooping up shares at more attractive prices.