Eli Lilly (LLY 1.65%) has had a tumultuous year. The pharmaceutical giant lagged the market for much of it, due to worse-than-expected financial results and a clinical setback.
However, the Eli Lilly has roared back and is up 32% year to date. The stock price now exceeds $1,000, which could potentially make the drugmaker a candidate for a stock split, a move that would attract even more attention to the company. Should investors expect it to announce a stock split anytime soon?
Why do companies split their stocks?
While stock splits don't strengthen a company's underlying business, corporations do them for several reasons. One is to keep the price of their shares within a "reasonable" window that makes it attractive to most investors. A stock priced at, say, $100,000 per share is likely to discourage many buyers from even considering it.
This has important implications, including reduced liquidity. Expensive shares have fewer willing buyers, making them harder to offload, whereas stocks trading around $100 per share can be bought and sold much more quickly. Liquidity matters to many investors, so they prefer a lower price tag -- even if the actual total price is the same, considering the adjusted share count that comes with a split.
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Now, some companies don't mind the drawbacks that come with a higher share price. Warren Buffett, whose Berkshire Hathaway's Class A stock recently traded at $763,867 per share, has said that the price it goes for attracts precisely the kinds of investors he wants. A split may not be in the cards for Berkshire Class A shares anytime soon.
But there's little reason to think Eli Lilly is in that camp. The company has done a stock split before -- actually, several, though the last one was in 1997. Shares have skyrocketed since then. And the drugmaker's run-up over the past decade is particularly noteworthy.
Corporations also conduct stock splits in anticipation of even more stock-market gains. That's another reason why Lilly might resort to one relatively soon. Let's look more into that.
Eli Lilly is flying on all cylinders
Eli Lilly has made significant breakthroughs in recent years, none more important than tirzepatide, a medicine indicated for the treatment of obesity and type 2 diabetes. The therapy's sales are helping the drugmaker post incredible top-line growth; third-quarter revenue soared by 54% year over year to $17.6 billion.
Over the past couple of years, Lilly has maintained a top-line growth rate well above that of similarly sized peers in the pharmaceutical industry. And there's more where that came from: Some market analysts now project that tirzepatide will reach sales of almost $62 billion by 2030.
NYSE: LLY
Key Data Points
In the meantime, Eli Lilly should launch several more products that will also help push sales higher, including orforglipron, a promising oral GLP-1 candidate.
Here's what's even more exciting: It's using its current success in the weight loss market to plan for the future. The company is doubling down on its efforts in artificial intelligence (AI), for instance. With the help of Nvidia, Lilly recently started building what should become the most powerful supercomputer in the pharmaceutical industry.
Eli Lilly aims to accelerate the slow process of drug development with this initiative. Given its long history in the industry and access to massive amounts of data on clinical-trial successes and failures, the resulting product could be impressive. It has also made key acquisitions to expand its pipeline well beyond its core area of expertise. So Lilly's medium-term outlook seems incredibly strong, given its excellent financial results, an extensive pipeline featuring several late-stage programs almost destined to become blockbusters, AI-related work, and more.
The stock is likely to continue beating the market for at least the next few years. And with a price tag already above $1,000, what might it be five years from now? That's why it's a good bet that Eli Lilly could resort to a stock split -- perhaps not immediately, but within the next few years. Even if it doesn't, though, its shares are worth holding on to for a long time.
