A massive market cap alone doesn't qualify a stock for inclusion in the so-called "Magnificent Seven." But that's pretty much how it's worked out. Because these seven tickers have performed so well of late, they've become some of the market's biggest companies as well.
But a check of market caps shows there is one curious exception to this correlation -- drugmaker Eli Lilly (LLY 1.19%). Its current market cap is a hefty $729 billion, making it bigger than Magnificent Seven constituent Tesla at $636 billion.
While a huge market cap doesn't automatically make a stock a better buy, Eli Lilly appears to be a great example of investors being so fixated on higher-profile names that they look right past a company deserving of its enormous market cap.
Eli Lilly's in the right place at the right time
You may or may not know much about Eli Lilly. Oh, you very likely know the company is a pharmaceutical powerhouse. But there's a fair chance you don't know its best-selling drugs are blockbusters like diabetes drugs Trulicity and Mounjaro, as well as cancer-fighting Verzenio.
However, none of these are the chief reason Lilly stock is up 180% since the end of 2021. The bulk of the market's bullishness is the result of something else Eli Lilly's been working on. That's weight-loss drug Zepbound, which was approved by the FDA in November.
It's the exact same molecule as Mounjaro, by the way. In fact, they share the same generic name (tirzepatide). The only benefit to using different names for different prescriptive purposes is avoiding confusion among its users; diabetics already know the drug as Mounjaro.
Whatever the case, the opportunity is believed to be enormous. Goldman Sachs says the global anti-obesity drug market could be worth $100 billion per year by 2030, up from last year's $6 billion. For perspective, Mordor Intelligence estimates global spending on cancer therapies will reach $220 billion this year -- after decades of drug development.
Analysts are confident Eli Lilly will capture at least its fair share of this impending growth, too. They're calling for top-line improvement of 21.4% this year before accelerating to a growth pace of nearly 24% next year. Per-share profits are projected to nearly triple during that two-year stretch. Things don't look too shabby past that point, either.
Data source: StockAnalysis.com. Chart by author.
This outlook is the key reason shares have been so red-hot of late -- investors are buying the stock in anticipation of this growth.
There are risks with high-valuation stocks
Eli Lilly stock's big gains over the course of the past couple of years present something of a conundrum, though. That is, shares are now very richly valued. The stock's priced at 60 times this year's expected earnings and at 41 times next year's projected profits. The drugmaker's income will likely continue growing beyond that 2025 outlook, but not all stocks are able to maintain such steep valuations based on bottom-line projections so far down the road.
There's also competition. Novo Nordisk is the most notable of these competitors right now. It makes Ozempic and Wegovy, which are actually quite similar to Lilly's Zepbound in terms of how they work, even though Ozempic isn't officially approved as an anti-obesity therapy. Amgen's early-stage studies of MariTide (maridebart cafraglutide) are showing promise, for instance. And with $100 billion up for grabs, other pharmaceutical companies are certainly working on alternatives of their own.
Eli Lilly is out in front of those would-be rivals, though, with the efficacy -- and safety -- of its Zepbound confirmed by its existence as the diabetes treatment called Mounjaro since the first half of 2022. Indeed, even before it was officially approved as a weight-loss drug late last year, Mounjaro was unofficially being prescribed as an anti-obesity solution.
Connect the dots. Lilly doesn't exactly have a tough row to hoe here with consumers and doctors, as many likely understand that Mounjaro and Zepbound are effectively the same (safe) drug.
Two key takeaways
There are two key ideas investors will want to take away here.
The first is that Eli Lilly does sit on an impressive portfolio of drugs headlined by Zepbound, but the stock's tough to buy at this time. Its incredible performance since 2020 has left it overvalued.
Be patient. Wait for a healthy pullback before diving in. It'll happen sooner or later. And it will be worth the wait.
The second takeaway is arguably more important. That is, know that the stocks you're hearing the most about at any given time aren't necessarily the best ones to buy at that time. They're not even necessarily all the biggest ones worth watching.
You would be wise to search for your own prospective stock picks outside the names being batted around the most by the financial media. You can bet even with its recent gains, most investors still don't realize Eli Lilly is now bigger than one of the Magnificent Seven (the aforementioned Tesla), and nearing the size of the next-biggest one, Meta Platforms.
In other words, worry less about labels and hype, and focus more on opportunities and competitive advantages. Some of those companies may end up being part of groupings like the FAANG stocks or the Magnificent Seven. Others might not. That doesn't make them any less fruitful.
